China's Scrap Metal Pioneer Seeks New Bases After Imports Shock

(Bloomberg) -- Chiho Environmental Group Ltd., one of the world’s biggest metals recyclers, is looking to set up operations outside China as a ban on most waste imports halts a trade that’s thrived for decades.

China’s restrictions on imports roiled global recycling markets by reducing inflows of everything from waste paper to second-hand clothes and used plastic. The government wants to reduce pollution and spur the development of a domestic industry. A crackdown on copper scrap imports that’s set to tighten at the end of the year now sees Chiho, which began shipping metal scrap into China from Europe in the mid-1990s, looking at alternative locations.

China's Scrap Metal Pioneer Seeks New Bases After Imports Shock

Chiho is discussing joint ventures in developing countries, including in South and Southeast Asia, that would perform the kind of manual dismantling usually done in places such as Taizhou on China’s east coast, Goh Kian Guan, chief investment officer, said in a phone interview. “We need to adapt because we have the biggest capacity for processing used electric motors in China,” he said, referring to the car parts that are taken apart for their metal content.

The firm’s traditional business has it obtain a mix of metals including copper, aluminum and steel from electric motors, cables and wires imported mostly from developed countries. A blanket ban on so-called Category 7 scrap will come into full force at the end of this year, halting that trade.

If Chiho moves its dismantling offshore, material processed there would then be fit to ship to China. It’s aiming for operations in multiple locations, and may start some early next year, according to Goh. The rejig prompted by Chinese regulations affects only part of the company, which gets more than 80 percent of its revenues from outside Asia. It became one of the world’s top recyclers with the acquisition of Germany’s Scholz Holding GmbH in 2016.

“The new regulations, and the trade dispute between the U.S. and China, are teaching us that it’s best not to have all our eggs in one basket,” he said. “It’s not likely any more to have something like Taizhou where you can process half a million tons of electric motors in one location.”

China’s copper market is already tightening after low-grade scrap was banned and the higher-quality grades were subject to quotas. Scrap purchases from overseas shrank by more than a third in the first nine months of 2018, while imports of copper in unwrought and product form are headed for their best year ever and mined concentrate imports reached record levels.

Premiums paid on overseas purchases of refined copper have surged, and Chile’s Codelco, the world’s top copper producer, said earlier this month that strong Chinese demand had left it almost sold out for next year.

“In the short term, we will continue to see an impact on copper premiums,” Goh said, noting that while many companies are seeking replacement capacity outside China, that won’t appear quickly enough. “A lot of smelters are especially concerned about potential disruption at the end of this year and into 2019, when the high-grade material stops altogether.”

China’s revised policy on recycling is a big switch for a country that’s swallowed up much of the world’s waste over the past three decades to feed its own manufacturing. It’s part of broader efforts to tackle pollution and speed up a shift away from low-cost processing.

“We always expected that environmental regulation would continue to tighten, and this is what we are seeing,” Goh said. “But what we did not foresee back then was that it’s coming in with such force, and I think all market participants have been taken aback by the blanket approach.”

To contact Bloomberg News staff for this story: Martin Ritchie in Shanghai at mritchie14@bloomberg.net

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With assistance from Editorial Board