Monday, January 26, 2009

China's Recyclers: Is a Rebound Ahead?

Chinas Recyclers: Is a Rebound Ahead?

For years China has been the world's dumping ground. Mountains of discarded plastic bottles, cereal boxes, cars, and other castaway items are shipped there to be melted, ground, or mashed into materials used by Chinese makers of everything from toys to packaging to steel girders. Some scrap dealers, such as paper maker Nine Dragons Holdings, made billions from the business. But the party came to an abrupt halt last fall as scrap prices fell by as much as 70% in the face of plunging demand. A pound of crushed soda bottles fell from 29 a pound on the U.S. West Coast to less than a dime as cash-strapped dealers in China couldn't pay up. "Even if you gave them the material for free, they couldn't afford to pay the customs duty," says Kathy Xuan, president of Romeoville (Ill.) plastics recycler PARC.

But as Chinese celebrate the weeklong Lunar New Year holiday, which started on Jan. 26, there are signs the Year of the Ox may be better for the trash business—and the overall economy. Aluminum alloy produced from scrap in China is now trading at $1,900 per ton. That's well off its August peak of $3,225, but higher than its November lows of $1,600. Waste paper has recovered to $100 per ton, after dropping from $230 to $90 last fall, while scrap plastic prices have clawed their way back to 14 per pound in the U.S.

More important, volumes are slowly picking up as Chinese manufacturers have begun to cautiously restock on recycled inputs. "Our orders have started to recover again in the past few weeks," says Tony Huang, president of Shanghai Sigma Metals, the world's largest recycling smelter, which produces aluminum alloy from shredded automobiles, window frames, and DVDs. Huang is pushing hard to expand domestic sales that he previously ignored during the export boom. "After the crisis we really start paying attention to the domestic market, but so is everybody else."

"Leading Indicator"

China is certainly struggling to cope with the fallout of the global financial crisis that has clobbered its export-oriented manufacturing industries in recent months. Last week Beijing reported fourth-quarter gross domestic product growth slumped to 6.8%, and economists are warning of an even weaker first half.

Still, some believe a recovery in recycled materials could presage improvements in China's broader economy later in the year. "This is a leading indicator," says Heather Hsu, an analyst who covers China's paper industry for brokerage CLSA in Hong Kong. She forecasts demand for container board will grow slightly this year as increased domestic demand offsets falling use in exports.

One source of growth will come from packaging for appliances sold in the countryside. Sales of refrigerators, color TVs, and cell phones are expected to get a boost from government subsidies of 13% on appliance purchases by rural consumers. Huang figures that if Chinese consumers buy enough toasters, motorcycles, and door frames, all downstream users of aluminum, then by yearend he can recoup sales lost overseas.

Those subsidies are part of a $584 billion stimulus package aimed at goosing the economy. Premier Wen Jiabao on Jan. 12 said the government would spend $88 billion on scientific and technological projects, on top of the stimulus unveiled in November. Although economists expect China's growth to slow to between 6% and 8% in 2009 after years of double-digit expansion, "our aim is to be the first to recover from the financial crisis," Wen said on Jan. 11, according to the official English-language China Daily.

Advantage, Paper Makers

That could be enough to help Chinese companies that weathered the downturn and bought scrap at rock-bottom prices. T&T Group, a Humble (Tex.)-based recycler that buys scrap plastic and processes it in the southern Chinese city of Dongguan, is seeing better days than it did during the boom, when materials were scarce. "There's not much competition," says T&T Group President Toland Lam. "For those who survived, the profit margin is two to three times higher."

Big players in the paper industry also stand to benefit from China's push to clean up the environment. Beijing has ordered the closure of hundreds of small paper producers, which will see some 6 million tons of capacity shut down in the next five years, or about 20% of the industry total. That should help leader Nine Dragons Paper (whose chairwoman Zhang Yin was China's richest woman in manufacturing until the company's shares hit the skids last fall) and No. 2 player Lee & Man Paper. Together, the companies produce about a quarter of China's recycled paper. Both companies once relied entirely on imported waste paper, but they're now sourcing increasing amounts domestically as China's recycling efforts gather steam.

But China will still be the world's biggest buyer of foreign waste for a long time to come. "We believe that worldwide demand for these resources will grow again," says Wes Muir, director of corporate communications at Houston-based Waste Management (WMI), which operates waste collection and recycling countrywide. "We definitely see China playing a role in this recovery." Shanghai Sigma's Huang agrees, noting that for now the country will rely largely on imported scrap, but that in five years or so, many cars now on Chinese roads will end up in his furnaces.

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