Toxic air catastrophe triggers scrap metal revolution in China

Minerals producers have made fortunes over the last decade
to slake China’s thirst for raw industrial metals.

But in the future their profits could be hit by the Middle
Kingdom recycling ever-greater quantities of its own ferrous scrap to meet
industrial demand and, more importantly, cut dangerous pollution levels.

It is an interesting time to be a scrap dealer in China. The
market for recycled metal in the world’s second-largest economy is booming.
Demand for steel scrap for smelting into new material in China surged by almost
40% in the first nine months of 2018 to around 150 million mt, according to the
International Recycling Bureau’s latest figures.

Stricter rules to reduce emissions, trade tariff wars on the
import of waste metals from the US and the rise of China’s urbanised middle
classes, who are now buying new white goods and throwing out old household
appliances with greater frequency, have triggered a scrap metal revolution in
the country.

“Many believe scrap is the future,” said William Chin,
senior vice-president and head of commodities at the Singapore Exchange (SGX),
in an interview this week with S&P Global Platts. The exchange, which is a
hub for iron ore trading in Asia, is considering launching a new scrap metals
derivative contract, partly in recognition of the growing market in China.

“Everyone I have spoken to has said scrap is going to be
big,” said Chin.

Emissions a political priority

China’s war on pollution will require more metals to be
recycled, a less energy intensive process than smelting ore. Despite a
concerted effort by the government to clean up the country’s dirty air,
emissions remain a major political and economic concern. Previously, China has
been forced to shut down its factories when the air became unbreathable.

The problem is particularly bad in cities like Tangshan,
China’s equivalent of Sheffield during Britain’s heyday as a major global
producer of iron and steel. The air in this city of almost 8 million people is
often classified as unhealthy for humans by the closely watched Air Quality
Index. China’s cities have outdone the grim image of dark satanic mills in
England’s industrial north painted by LS Lowry.

The annual meeting of the National People’s Congress, which kicked off this week, was shrouded in thick smog smothering Beijing. The high levels of pollution wafting in from neighboring industrial cities in Northern China will have served as a reminder to delegates in the Great Hall of the People to not relent on their campaign to clean up the environment.

Premier Li Keqiang opened the gathering by vowing to sharply cut emissions of sulfur dioxide and nitrogen oxide, both major pollutants produced by the country’s dirty iron and steel foundries. Mixing scrap metal into their furnaces is a way for China’s steel mill owners to meet demand, while hitting new emissions quotas.

Global impact

China’s domestic supply of scrap metal should also help to
reduce its dependence on imports of iron ore. The country accounts for over 70%
of the 1.6 billion mt annual market for the steel-making ingredient. This will
continue but the blend of imports is changing to take account of new
environmental standards and the growing use of domestic scrap by Chinese

The recycling drive also extends to non-ferrous metals such
as copper. China’s decision last year to impose a 25% tariff on the import of
US recycling materials including copper means domestic supply has to increase
to help meet industrial consumption. The government has also introduced
legislation to regulate imports of waste materials to prevent China becoming
the world’s rubbish dump and last year already banned imports of mixed metal
waste, with lower metal contents.

However, China still needs more domestic metal and
industrial scrap to keep its giant economy humming. Although exports suffered
their biggest drop in three years last month, the government has unveiled
almost $300 billion of tax cuts and stimulus measures over the last week, to
help support growth.

Despite the robust fundamentals to support the global ferrous metal scrap market, prices have remained weak, partly due to China’s growing use of its own domestic supplies instead of importing more waste material from overseas. The price of the Heavy Melting Steel benchmark assessed by S&P Global Platts has dropped by almost 15% to around $322/mt over the last year to date. However, the decline is mainly due to problems in the Turkish market, a major hub for scrap.

China’s push to use more of its own scrap metal, to help clean up its dirty air and reduce foreign imports, will be an increasingly important factor for global commodities investors to consider and a way for this industrial powerhouse to prevent catastrophic levels of pollution from ruining its economic achievements.

This article previously appeared as a column in The Telegraph

The post Toxic air catastrophe triggers scrap metal revolution in China appeared first on The Barrel Blog.

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