Everyone Misunderstands China / Global Recycling Chains (#WSJ)

Wall Street Journal and others are running stories about the crash in recycling prices due to China's new import restrictions.  There is a grain of truth to the story, but there is so much more going on that I have to issue a quick explanation [US Recycling Companies Face Upheaval from China Scrap Ban].

It has little to do with the sentiment in China over "western garbage". That trite little meme is everywhere on Twitter.  It's something else entirely.



Four things to know about recycling before you read the Wall Street Journal article.

  1. Recycling doesn't compete with landfills. Neither are free, and the less that's recycled, the higher the price of the landfill capacity.  
  2. Recycling (true recycling, not "diversion") competes with virgin raw materials. Forests, hard rock mines, petroleum.
  3. Recycling prices generally follow oil prices, because a large part of the value that a ton of recycled paper, metal, or plastic is the energy it took to make it from trees, rocks, and crude oil.
  4. There are not "good" markets and "bad" markets - there are "sellers" markets and "buyers" markets.  China's restriction is a boon for USA tissue paper, paperboard, steel and aluminum consumers, plastic lumber companies, etc.

You don't quit your retirement savings every time the Dow Jones drops.  Recycling is a long term policy, one that is based on raw materials and the need to diversify waste treatment options.  Sometimes landfill will be cheaper, some years incineration will do well, some years recycling is profitable.

So what is going on with China?  There is a real ban policy, and it is strongly affecting recycling program prices. But it's the extraction companies, and China's goals for their capacity, that drives the policy (40 largest mining companies on earth).

The USA's General Mining Act of 1872, passed by Ulysses S. Grant to promote western pioneering amidst the Apache Indian Wars, set the price of mining etc. on federal land at $5 per acre. That was a tuition payment back then.  That price never changed, and it subsidizes the virgin raw material industry.  It led to America's becoming "King Copper", something you might remember from high school textbooks.

Extracting on federal lands has little pollution repercussion (14 of the 15 largest Superfund sites are hard rock mining operations abandoned on federal land).  Industry hasn't had to clean up for itself.

There are no raw material royalties paid for the metals industry extracts.  The mining fees do not even begin to cover the payroll of the US Interior Department, which administers the federal lands.

A bigger subsidy on heavy industry I know not of.

See Slashdot lecture...

So, 20 years ago, China's economy was growing, but China had no huge mining and timber or petroleum refining conglomerates.  China's choice was either to subsidize the Alcoa, BHP Billiton, Rio Tinto, etc. and let them have the raw materials for nothing, or to recycle.  China had a lot of labor and the "added value" and captured energy in American and European scrap was a great match...

The losers were the USA Raw Material consuming industry, which - 50 years ago - had the scrappers and recyclers over a barrel.  The scrappers and recyclers were highly leveraged by the artificially low price of virgin raw material.  The scrap industry used to swing wildly when US paper buyers would build up a huge inventory of virgin pulp or recycled bales and then cut off all the small scrap yards until the price was beat down to "scream uncle" levels.  I remember those times.

China's now a big enough economy that it wants its own virgin material extraction companies - Zijin Mining, China Shenhua Energy, Jiangzi Copper, etc. - to be able to leverage scrappers the way USA raw material buyers did.

The Recycling and Scrap Industry did really well when Chinese demand rescued us from USA Industry leverage.  Never has there been as long a positive run in scrap prices as during the past 2 decades.  The prices WSJ writers are hand-wringing about today are the prices we all had in the early 1990s.  It was a very long "sellers market".

If you want to know what China's going to do, look how China manipulated prices for rare earth metals (mostly mined in China) a few years ago.  China banned export, driving the prices way up.  But as soon as investors began trying to open USA rare earth metals mines, China ended the ban, sucking the wind out of the investment portfolios.  Turning the faucet on and off, on and off... it leverages the market.

That's what will happen with scrap materials now (at least until India hits the $4k per capita per year economy that drove China's consumption boom).

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