China’s Scrap Import Ban: A Shift in Global Plastics and Metal Recycling Industries

China’s Scrap Import Ban: A Shift in Global Plastics and Metal Recycling Industries

Executive Summary

  • China’s ban on various scrap import, which comes into effect from December 31, 2018, has increased complexities for plastic and copper scrap processing industries in Southeast Asia.
  • The effect of China’s ban has not only impacted waste exporters and recyclers but has created bottlenecks in metal and plastics supply chains.
  • Illegal plastics recycling factories in Malaysia are likely to continue functioning, as the government struggles to control foreign plastic scrap amid environmental pollution.
  • With uncertainties looming, the new ban will push copper refinery operations into Southeast Asia where regulations are less severe at the moment.
  • A further unintended consequence of the ban has been port congestions in Vietnam, and potentially, at other ports in South East Asia, as waste imports without valid licenses pile up at key port terminals.
  • The bans may also impact the availability and the price of plastics and metals worldwide.
  • Customers relying on such materials for manufacturing purposes must stay abreast of national guidelines issued by new countries in South East Asia accepting scrap waste.

Background

After almost a year of initiating the ban to stop 24-types solid waste import into China, Beijing recently announced that they will be officially expanding the list to 32-categories by the end of 2018. Effective from December 31, the newly added items include stainless steel scrap, titanium scrap, wood scrap, used hardware, ships and auto parts. The latest legislative actions indicate that China is committed in its strategic war against environmental pollution by controlling the levels of impurities in the waste products that are imported into the country.

Beijing’s effort to shut down coal, mining and heavy industry productions for both the short and long term are evidence that combatting pollution is a priority of the Chinese government. The initial ban caused a worldwide commotion as it left limited choices for recyclers from Europe and the United States to find alternative markets to import their scrap materials. The drastic change also caused significant disturbances to the global supply chain because just two years earlier, China was the world’s top recipient of scrap and waste with an intake of about 28.5 million metric tons of scrap paper and over 3.3 million metric tons of copper-bearing scrap. Sources report that 775,000 metric tons of plastic scrap were shipped to China from the US alone.

However, the ban simultaneously serves as a double-edged sword for its domestic recycling industry where hundreds of small-scale scrap businesses have grown since the 1980s and are dependent on the imports for production. According to reports, 72 percent of global plastic waste has been imported to China and Hong Kong since 1992. The scrap trade provided an outlet for higher income countries such as the US, the United Kingdom, Japan and South Korea to dispose their scrap materials into China. This was when China believed plastic material to be a profitable commodity for its manufacturing sector in order to transform it into new forms of products for exports. The constraint came about when environmental concerns were raised due to rising water and air pollution in recent years, leading Beijing to reflect on the environmental cost the nation had borne for its rapid industrialization.

Thus began a series of bans to gradually fulfil Beijing’s ambition to stop all solid waste import permanently by the end of 2020. It was reported that even prior to the ban, authorities cancelled waste import permits of 960 companies and shut down 8,800 firms in 2017 which were accused of violating scrap import regulations. Within months of implementing the ban in early 2018, parts of the global supply chain felt a ripple effect due to port congestions and new regulations faced by ocean carriers.

Under an operation called “Sword at the Country’s Gate 2018”, Chinese Customs authorities began cracking down on criminals involved in the smuggling of foreign scrap. Sources indicate that around 110,000 tons of smuggled waste were reportedly seized in the first quarter of 2018 and customs authorities have arrested 576 suspects since January for illegal scrap smuggling activities. Moreover, authorities have set higher criteria for scrap importers with the hopes of impeding the inflow of low- grade scrap materials into China.

This report explores the impact of scrap import ban, particularly on plastic and copper scraps, and the wider impact on industries relying on these materials for their supply chains.

Developments in Plastics Recycling

Plastic is an affordable commodity which is used widely from daily household goods to manufacturing. Single use plastics, such as those used in packaging of food, beverage and other items, are only used once, which means that a cumulative total of 6.3 million metric tons of plastic waste are generated on a global scale, contributing to about 61 percent to beach litter. The mounting increase of the use of plastic and the effort required to manage such wastes have been an ongoing challenge for countries with high population growth. According to sources, only 9 percent of plastic waste has been recycled globally while the rest have been buried in landfills or have been incinerated, thus creating air pollution.

The initial ban on scrap imports in China created mounting wastes in developed countries, as they searched for new markets, particularly in Asia with less regulatory monitoring, to dispose the scraps at. As a result, Vietnam, Thailand, Malaysia and Indonesia quickly became the go-to solution for plastic recyclers in Europe and the US. However, these new markets are still not in a position to cater to the large amount of scraps which China was able to accommodate previously.

Port terminals at risk of persistent congestion

In May 2018, reports emerged that major ports such as Cat Lai Port and Hai Phong Port in Vietnam were facing severe congestion with high volumes of containers filled with paper, plastic and metal scraps. These ports faced capacity constraints due to piles of import containers of scrap from around the world that were left unprocessed for over 30 to 90-days. Illegal and legal scrap imports into Vietnam became overwhelming to the point that it prompted the local authorities in June to impose an initial three month ban on scrap import. However, the issue of port congestion remains relevant enough that authorities have extended the ban until further notice. As a result, major shipping lines also stopped accepting plastic scrap and plastic waste to all ports in Vietnam. The ripple effect of China’s scrap ban did not only cause scrap containers to be stranded at ports across Vietnam but it has also indirectly affected Vietnam’s recycling industry, particularly for plastics.

Vietnamese plastics recycling hit hard

According to sources, recycled paper and plastic shipments are not allowed to contain more than 2 percent of impure content. Empty plastic water bottles are allowed to be imported; however, bottles containing sweetened drinks are prohibited. This has been criticized by the local plastic industry as the authorities have not clearly defined what it means by ‘clean’ plastic scrap, thus making it difficult for importers to abide by the restrictions. Simultaneously, customs authorities have initiated a crack down on illegal scrap smuggling at the ports. Furthermore, it was announced on December 6 that Vietnam has implemented an outright ban on e-plastic imports, which are normally categorized under the ‘other plastics’ category when shipping overseas. It is likely that more restrictions are on the way as ports across Vietnam continue to experience significant delays in vessel berthing times.

According to local sources, around 3,000 containers of scrap including paper, plastics, and steel have caused congestion at Cai Mep-Thi Vai port. As the congestion has been ongoing for some time, manufacturers are concerned about the implications it may have on their respective industries. Although the regulation imposed by the authorities were well-intentioned with the aim to decongest ports, Vietnam’s domestic plastic recycling industry now faces a new set back.

Sources indicated that local plastic firms would lose about USD 10 million (EUR 8 million) in 2018, if they are unable to import plastics scrap for manufacturing. This is because the plastics industry in Vietnam has been growing at an annual rate of 15 to 20 percent over the past decade. In 2017, 4.9 million tons of plastics pellets and a significant volume of plastics scraps were exported overseas.

Plastics companies are also susceptible to bankruptcy as 4,000 tons of plastics scrap and raw materials required for production have been withheld at ports by the customs for detailed inspection. Reports suggested that importers were charged with USD 50 – 60 (EUR 44 – 53) for each container’s delay on a daily basis which means that the charges are likely to be higher than the value of the scrap itself. In turn, this may lead to production stoppages and compensation payments to buyers as a result of the delays.

According to reports, the recycling industry needs about 80 percent of plastics import for productions as local recycled plastics cannot be used due to poor quality. Only 90 tons out of 900 tons of plastic wastes were being recycled in Ho Chi Minh City, which indicates that local recycling sector is relatively still weak as there are no mechanism to sort between regular trash and plastic.

Considering these measures, the industry would be placed in a vulnerable position if the government were to permanently ban plastic imports into Vietnam. A possible solution to this predicament could be for importers with valid licenses to import plastic scrap while simultaneously implementing a policy to effectively ban various types of scraps that cannot be recycled, as well as speed up the process of scrap container inspection at various sea ports.

As of late November 2018, congestion continued to be reported at Cai Mep – Thi Vai port with 3,000 scrap containers comprising of steel, plastic and paper still being processed – a ripple effect of China’s ban. According to sources, the authorities will permit scrap containers with valid environment protection certifications to enter ports and goods receivers are required to leave a security deposit to ensure they will take their goods, on the condition that the volume of scrap loaded at ports should not exceed the permitted import volume. Immediate solutions indicate that some scrap containers will be moved from Cat Lai port in Ho Chi Minh City to neighboring seaports, including Ba Ria-Vung Tau.

Another country that is also facing a similar situation like Vietnam is Malaysia. Although Malaysia had also imposed a temporary ban on plastics imports, it has been reported that some recycling factories are illegally functioning to process scrap plastics and trying to profit out of the precarious situation.

Profiting through burning plastics

While Vietnam’s plastics industry is being affected by the ban, ironically, illegal recycling factories have popped up in Malaysia and are profiting from the situation. Three months prior to China’s announcement on its initial ban, many plastics recycling plants without operating licenses appeared in the Pulau Indah industrial zone in the Klang district. According to government data, only two factories have valid licenses to import plastic waste.

According to figures, import of plastics wastes in Malaysia from 19 countries had increased to 754,000 tons compared to only 316,000 tons purchased in 2017 and 168,500 tons in 2016. The US alone is the top exporter of plastics waste to Malaysia with an import of 178,238 tons between January and July 2018 followed by Japan and the United Kingdom.

To cater to such a large amount, dozens of factories without valid licenses came about to make fast cash. Environmental protection groups have pointed out that the process of making used plastics with low-end technology poses pollution risks as plastics that are not useful were openly burned at night and toxic chemicals were released into the open air. Other times, these unused plastics ended up in landfill with the risk of soil and water contamination.

ollowing complaints that Malaysia was not only struggling with internal plastics problems but also becoming the top dumping ground for foreign waste in September 2018, the government permanently banned the import of plastics scrap in the following month. However, it was reported that companies can still apply to import quality and clean plastics. Discussion on controlling the volume of plastics waste import and imposing severe requirements on recycling premises and import licenses are reportedly still ongoing and unlike Vietnam, the impurity percentage rate has not yet been officially announced.

As a sign of the Malaysian government’s efforts to curb the activities of those operating without a license, Jingye Manufacturing Sdn Bhd, one of the largest recycling plants in the country, was ordered to shut down in August 2018 for not owning a valid license to operate. However, the factory reportedly reopened within two weeks. Sources report that eight illegal factories were set up in the same area within a short span of time. In another nearby district of Kuala Langat, authorities found 41 recycling factories reportedly owned by Chinese firms that were operating illegally. It remains unclear how these illegal factories are sourcing plastics waste for their productions. Some reports claim that 95 companies that have permits to import and recycle are likely to be subcontracting to illegal factories as they also lack the capacity to handle such high volumes of plastics scrap.

Although authorities have shutdown 30 plastics recycling plants in the last three months due to growing air pollution, it is evident that law enforcement to regulate such activities has not been effective. Authorities may also be on the fence about completely shutting down such illegal plants as the local authorities are aware that plastic is a lucrative business. Malaysia’s Minister for Environment stated that the country would earn an estimated Malaysian Ringgit 3.5 billion (USD 841 million; EUR 731 million) in 2018 from the plastics industry. The fact that there is noticeable, growing air pollution and mushrooming of illegal recycling factories across Malaysia demonstrates that law enforcement and regulatory controls on plastics waste is still insufficient.

Uncertainties with plastics recycling in Southeast Asia

It is a question where global plastics waste will continue to be dumped if China and a few countries prohibit scrap import with a ‘not in my backyard’ approach. Due to widespread campaigns against plastics usage, governments as well as multinational corporations have taken initiatives in banning the use of plastic bags or single-use plastics recently. However, an outlook for plastics waste in the nearby future would still be recycling. China’s ban on scrap import has no doubt disrupted the global flow of plastics waste. As of now, it remains unclear the full extent of the impact on plastics recycling industry as it is a complex process, especially in Asia, with many challenges to be addressed. The lack of conversion capacity using high-end technology and improper infrastructures in many Asian countries will be the main challenge for the plastics industry. In due course, the bans from China and other Southeast Asian countries may force importing countries to strengthen their own recycling sectors.

Ban on Metal Scraps

Prior to the official ban on metal scrap, many copper manufacturers, traders and recyclers were anxious about China’s intended ban on various scrap grades and the effect on the country’s overall metal supply. The newly extended ban focuses on category 7 types of scrap which includes a wide range of copper products. Reports indicate that the ban will stop the import of metal scraps that are only 5 percent less copper, including oiled copper cable, waste motors, no 1 and no 2 copper, copper chops, twitch and zorba effective from December 31, 2018. However, China’s new threshold for metal scrap import is quite rigorous making it difficult for importers to meet the new standards, where impurities for non-ferrous metal have to be 1 percent or lower. Furthermore, the ban includes materials with contamination level of not more than 0.5 percent in ferrous metals, paper and waste electric motors. By setting such a low impurity rate, China conveyed a clear message to international metal recyclers that they need to change their technology and sorting techniques if they want to continue to import scrap to China.

Such regulatory measures understandably raised concerns from associated industries regarding the future of metal scrap and in particular for copper. This is because China has been the biggest importer with a 45 percent intake of copper scrap that has fueled its economic growth, especially in the electronics sector. The ban could likely remove around 300,000 tons of copper from the market. According to sources, Hong Kong, the United States and Australia made up almost half of the copper scrap China had imported in 2017. With uncertainties looming, the new ban will push copper refinery operations into Southeast Asia where regulations are less severe at the moment.

Copper scrap business shifts to other Asian nations

As the countdown begins to the end of 2018 following the ban announcement, local copper recycling firms in China have already begun the process of setting up refinery plants in Thailand and Malaysia.

Essentially, Chinese scrap metal refineries are seeking overseas’ locations to perform dismantling work on the category 7 scrap which is mainly bought from the United States to convert it into higher grade material. As China’s electronics sector will only continue to grow, the demand for high-grade import will only increase. Vietnam, Indonesia, Myanmar, Laos, and India are amongst the nations which industry sources consider as alternative scrap processing locations to take on the global demands due to low labor cost and less severe regulations. India is expected to see an annual increase of 8.8 percent in demand for copper in the next five years as its appetite for copper may grow following a shutdown of Tuticorin smelter in May 2018. The shutdown has impacted local copper manufacturers due to a lack of adequate supply of metal in the market.

Chinese state run Jiangxi Copper which uses scrap and copper concentrates to produce refined copper was reportedly considering establishing facilities in Southeast Asia due to the import ban. There are also some companies who are taking a ‘wait-and-see’ approach in the event that Beijing changes its regulations after feeling the impact due to the ban. This is because China reportedly imported 1.6 million tons of copper scrap in 2017. The fact that the government did not give sufficient time for companies to react and strategize makes it even more challenging for firms to undertake any massive relocation of refinery plants to fill the big gap.

Outlook of copper scrap

The ban on metal scrap is likely to impact metal prices globally as China clearly wants to consume its own domestic waste and scrap. Although the restriction will not come into effect until next year, the imports of copper cable and waste have already decreased by 87 percent since April 2018.

According to industry sources, imports of copper scrap from US to China declined by 37 percent (6,065 tons) between September to October 2018, which is less than one-sixth of the import volume in October 2017. As of October 2018, US had 2.5 percent of copper scrap imports to China compared to 22.3 percent in January. The US-China trade war also contributed to the decline of copper import and export between the two countries as in August 2018, China imposed a 25 percent import duty on US scrap going to China.

Industry sources reported that copper prices have been affected since the initial unconfirmed news emerged about banning the scrap metal in 2016. Since then, the price has gradually increased as the imports of category seven copper has declined and companies have turned to category six imports such as ores and concentrates. An average annual market price for copper in 2018 is currently at USD 6,917 per metric ton (EUR 6,088) compared to 2016, when it was USD 2,054 (EUR 1,807) lower. See figure below:

Figure 01: Annual market price for copper in USD; Source: Statista

Furthermore, the imports of ores and concentrates have increased by 14 percent, up to 7.8 million tons, in the first five months of 2018 compared to the previous year. Despite the legislations, copper will remain an important metal for China as it is likely to continue to be in demand in the coming years. This is especially true as China strives to become a major manufacturer of electric vehicles which requires more copper for its lithium-ion batteries.

The ban may also shift China’s strategic purchasing stance, such as buying more semi-finished products instead of simply raw materials in order to replace metal scrap imports. This indicates that China may consume finished metal instead of processing metals as before. The changes will shift manufacturing and the supply chain processes, as it will force other countries to process and make scrap into ingot, brass bar and copper rod instead of relying heavily on China for the refinery process.

Furthermore, the market for copper and aluminum scrap are likely to benefit from Chinese scrap legislation as the availability of these scraps will increase significantly in the world market without China’s consumption. However, there are doubts about how much capacity the aforementioned countries can sustain due to insufficient infrastructures such as ports, local scrap processing systems and controls, technology and technical expertise in the metal refinery process. Such challenges in these markets are likely to hamper the trade and logistic side of metal scrap import that may cause an increase in the overall costs of using scrap.

Impact on Supply Chains

The effect of China’s ban on scrap imports has not only impacted waste exporters and recyclers but has created bottlenecks in metal and plastics supply chains. Shipping carriers implied that the scrap ban was the primary reason for the decline in shipments to Asia during the first quarter of 2018. Ports and shipping lines have seen a decrease in volumes in the first quarter of 2018 as scrap goods are being diverted to other Asian countries. According to US reports, ports along the West Coast are feeling the effect as stringent contamination standards have led shippers to send scrap cargo to landfills instead of overseas as before.

As the ban gradually becomes permanent by 2020, scrap importers are aiming at markets in India and Southeast Asia to dispose of the scraps. China has, for many years, been the country with an established market, human resources and the necessary infrastructure to be the world’s top importer of scrap. Despite this, scrap import capacity of China cannot be replaced at least in the near future, as these emerging markets need time to adjust to the regional shift.

Industry sources estimate about 50 percent decline in plastic recycling globally for 2018 with a likelihood of that figure further dropping in 2019 as few Asian countries are likely to follow China’s footsteps. The recycling industry in the US, the world’s largest scrap exporter, is in jeopardy as residents are now being charged more for collection of recyclables. Some are being stored at recycling plants that cannot generate profit for domestic or export markets.

Recommendations

Everstream Analytics customers with an interest in the plastic and copper recycling industries are advised to keep abreast of regulatory advisories from China concerning scrap and waste import. It is imperative for manufacturing and recycling sectors to be aware of the market conditions in order to have time to strategize and adjust one’s supply chain accordingly.

The bans may also impact the availability and the price of plastics and metals worldwide. The plastics industry is dynamic and experts forecast that it is likely to grow as the world’s economy expands. Specialized plastics are now being used in construction, automobile, medical, aviation and space industry as well as for producing specialty athletic footwear. However, due to anti-plastics campaign and China’s regulations on plastics waste import, recycling fees in the US and Europe will likely increase. This means recycled plastics will likely cost more than the cost of new plastics due to operational costs. Furthermore, uncertainties with the US tariff as well as additional ban on metal scrap may disrupt metal supply chains in the foreseeable future. This may raise metal prices and affect consumers.

Customers relying on such materials for manufacturing purposes must also stay abreast of national guidelines issued by new countries in South East Asia accepting scrap waste. This may include guidelines on the impurity level of scrap import, and shippers should only send shipments that only comply within the set criteria.

As other countries become more open to the idea of accepting imported wastes in light of China’s ban, congestions can be expected at sea ports, where infrastructure, traffic in the port vicinity, vessel delays and cargo weight limit for trucking may not be sufficient to cope with a sudden influx of imported waste. Furthermore, lack of valid import permits for waste import has further exacerbated inspection time, causing delays in cargo clearance. Port congestion in Vietnam is likely to continue with no sign of waste import ban being lifted in the near future; recently Taiwan and Thailand has also joined other countries in curbing foreign plastics import.

Customs delays or vessels’ waiting time at the ports can be shortened by providing valid permits and necessary documentation including stating the impurity level, local business partner’s address and showing a proof of license. Importers and manufacturers should also take into an account possible delays at ports due to stringent inspections by customs officers. As this involves a complex web of different parties, including governments, customs, ocean carriers, exports and import manufactures, it is imperative to adapt to the circumstances.

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