US scrap dealers are hereby stimulated (by China)

Shanghai Scrap is withholding comment on Barack Obama’s economic stimulus in favor of compelling anecdotal evidence that – while the US Congress debates how to stimulate anything – the Chinese government is stimulating the US scrap industry.

Here’s the deal:

Late last year, with little notice, China’s State Reserve Bureau announced that – in an effort to stimulate its flagging non-ferrous metals sector – it would fund the acquisition of a large non-ferrous metal stockpile. Soon after, Yunnan Province – home to a thriving non-ferrous industry – announced its own strategic reserve to include 300,000 tons of aluminum, 100,000 tons of tin, 300,000 tons of zinc, 150,000 tons of lead, and 150,000 tons of copper (details on both programs, here).

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Keep in mind that, in the wake of the economic crisis, and the collapse in China’s export manufacturing sector, the non-ferrous metals industry nearly collapsed due to a lack of demand and excess inventories purchased at record prices. As a result, raw material suppliers – including US scrap metal dealers and Australian miners – found that, in the space of two months, their biggest and best customer (China) simply disappeared.

Cut to this afternoon, and lunch with four mid-sized US scrap metal exporters (and one physician). I arrived expecting to hear market doom and gloom (despite a modest recovery in the markets), as well as harsh words for the large number of Chinese scrap buyers who had reneged on contracts during the October market collapse.

How wrong I was.

To a dealer, these fellows were absolutely overwhelmed by the sudden market demand from Chinese scrap metal consumers (two told me that the calls started coming on January 5). China, they told me, was buying again, and it was buying big. Two of them told me that they were actively seeking US metal for export to China, and the others were seeing a definite uptick in orders. After a relatively brief discussion, they attributed the demand to Chinese stockpiling. Needless to say, there was no talk of broken contracts or scrap kidnappings (grudges, I’ve learned, feed off bad markets, not good ones).

Instead, for these dealers, the new, pressing question is whether or not China can and will stockpile until its manufacturers begin demanding metal for their factories. Longer-term, they agreed that the stockpile all but guarantees that non-ferrous metal prices won’t soon reach the records of mid-2008 (just a question of the price at which the government chooses to release it). A less obvious, but equally important consequence is the benefit it bestows upon the large(r), mostly state-owned metal firms allowed to stockpile metals (with government money). Small, independent smelters, never favored by Beijing, will find themselves at a distinct disadvantage when the stockpiles are released.

[Addendum: I just finished a phone interview in regard to the effect of the global economic crisis on municipal recycling programs in the developed world. As has been amply documented here and elsewhere, scrap recyclables are piling up in municipal warehouses across the developed world as a result of falling demand for their use in new products. So, in answer to the obvious question: no, the Chinese stockpiling program won’t rejuvenate demand for the bottles, newspapers, and cardboard boxes that you leave on the curb every Tuesday. It only covers metals.]

5 thoughts on “US scrap dealers are hereby stimulated (by China)

  1. Now I knew that paper and plastic recyclables (not even sure I am not being Orwellian by calling them that) are piling up, but I always assumed there was and would always be a market for glass and metals (at least at some price). But you say “bottles” are piling up too?

  2. Dan –

    You assumed right about metals – somebody’s always going to buy those, if only to stockpile them. But glass bottles are another matter. Remember, the raw material to make them is sand – and that’s cheap – so there really needs to be high demand for them if they’re going to flow into the recyclable waste stream. And right now, there just isn’t (except for companies that buy back their own bottles via deposit).

    “Recyclable” is, for better or worse, a term of art in the industry. I use it all of the time (but then, Orwell is my favorite essayist).

  3. The primary energy savings in recycling metals is not cost of raw materials, but cost of energy. Most metals are much less energy-intensive than aluminum, as is glass. So I’m not surprised about the collapse in those markets. Aluminum is the one that’s surprising, and worth some deeper digging.

    There must be some deeper economics behind the drop in aluminum prices. Recycling aluminum saves more in energy than in avoided bauxite purchases, and this advantage grows with higher energy prices. Is it the cost of shipping? Long-term vs. short-term contracts? Some other factor?

    Dan is right to talk about Orwellian recyclables. Whole product lines have been developed around the availability of free recycled plastic: Tyvek envelopes, plastic lumber, artifical fleece. But at least #1 and #2 can be recycled and kept out of landfills. The most Orwellian of them all is plastic #7 (“Other”), which usually refers to something that is an amalgam of other plastics.

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