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A look at the 2018 nonferrous market: the Wrath of the Goddess of the Earth

2018 – the year of the nonferrous scrap market’s downfall – or is it?

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This year has gone down as one of the toughest years in many for the global nonferrous scrap industry and the recycling industry overall. With new initiatives getting launched in every corner of the world to reduce waste and increase material recycling for the manufacture of new products, one would think there would be less ending up in our landfills. Unfortunately, that simply has not been the case.

Operation Goddess of the Earth is a three-phased initiative started by the Chinese government in April 2009. One of the policies enacted since then has been to reduce the country's foreign scrap intake - to help protect its environment and to focus more on recycling local scrap. The latest phase of this initiative, dubbed Blue Sky 2018, continues to enforce significant limitations on the type of scrap accepted at Chinese borders, and on recovery percentages, to ensure that China is only importing premium grades of the world's scrap.

These policies mean there is virtually no tolerance for contaminated material shipped from foreign markets, and there are vigorous scrap inspections at the point of origin. This kind of policy costs buyers and sellers of scrap precious time, money, and poses numerous administrative challenges.

Until a few years ago, many countries were counting on China to take as much as 70 percent of their scrap, some of which consisted of lower grade nonferrous metals. Yard infrastructures and other facilities that would generate nonferrous and other scrap were geared towards pushing this kind of material out of their system towards foreign markets such as China where not only the processing cost was lower, but where environmental restrictions were also not as rigorous. This was true especially for more developed countries where labour and ground logistics are so expensive that it was much cheaper to load all materials into a container and ship it to the other side of the globe, rather than moving it to another province or state where often an hour's wage would be equal to a whole day's wage in another country.

However, significant changes, both expected and unexpected, have started affecting the scrap industry since 2016, and it has become more and more apparent that our current global market situation for scrap materials is not just another passing phase. Since the Chinese government started implementing their restricted scrap import policies, businesses now know they will not be experiencing the same global market environment again in the foreseeable future. 

Historical copper prices YTD 2018 (Source: LME).

For nonferrous, 2018 was a downward trend continuation of what was already happening in 2017. One reaction to this has been that many scrapyards throughout the developed world have started adding to their downstream processing - to either achieve higher grades of nonferrous scrap that passes their threshold for export, or create a product that would be acceptable to the local market. However, this change has come to recyclers at a cost. It has forced significant capital costs upon recycling businesses and at the same time, due to higher supply and lower demand in the local market, it has put more and more downward pressure on profit margins. 

With the trade war between China and the U.S. already in place, we have also been witnessing a decrease in the overall prices of raw material, including nonferrous, which has in turn taken its toll on the recycling market. To complicate matters further, there is almost a unilateral agreement among economists that the longest bull market in U.S. history will be running out of fuel in the next few years, perhaps triggering years of recession when it ends. After all, scrap demand is in correlation with manufacturing output.

As for businesses in China, and in other large economies such as India, there are two main scenarios: one is that the main importers of nonferrous scrap are now considering investment in the country from which they were purchasing most of their material, so processing can be done prior to shipment. This makes it easier to continue importing, but as discussed above, at a lower profit. 

On the other hand, in these same countries we are seeing an unprecedented amount of scrap businesses shutting down, either voluntarily or because governments and regulators are cutting them down for noncompliance issues and violations. At the same time, we are witnessing new businesses flourishing (with similar identities and owners) in other third-party countries like Vietnam and Malaysia. Over time this has triggered their government's reaction to the sudden, rapid increase of importation of nonferrous and other scrap. The local infrastructure of these markets has not been set up to replace the volumes that China used to take, and they will almost certainly never be able to replace China as the main importer of lower grade scrap. 

And while we see new preventative, environmentally conscious measures being taken by the authorities in these countries, very similar to what the Chinese government has been doing, one would wonder if it's only a matter of time until there will be a similar clamp down on new businesses. More importantly, what's next if something like this happens?

So far, we have not had enough time to adjust and look for more suitable and sustainable solutions to the challenges posed by this shift, especially with respect to finding alternative nonferrous and other commodity end markets for the large amounts of recyclable materials that continue to be created.
We expected the downtrend trajectory for the price of nonferrous in 2018. We can only wait and see if 2019 will be any different.

Kamyar Lolavar Tehrani is the business development manager of Everison International Group Inc.

This article was originally published in the November/December 2018 edition of Recycling Product News, Volume 26, Number 8.

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