Security Shredding and Storage - a shredding industry publication

Export Regulations
China Appears to Have Maxed-out on Demand for Recovered Paper Imports


By Ken McEntee
In September, U.S. recovered paper exports to China dropped to the lowest monthly volume in more than four years, according to trade data from the U.S. Commerce Department. The 10 percent August-to-September decline continued a noticeable trend: U.S. exports to China have declined in three of the last four years. A 7 percent drop last year followed a 1 percent reduction in U.S. exports to China between 2011 and 2012.

In 2011, exports rebounded with a 23 percent increase following a 9 percent reduction between 2009 and 2010.

Through the first nine months of 2014, exports to China were down 4 percent compared to the same time in 2013.

If the January-to-September trend holds, exports to China will finish the year 10 percent below the record 15.8 million tons shipped in 2011. In 2011, with Chinese paper and paperboard producers continuing to announce large expansions on production capacity, U.S. traders generally expected demand from that market to increase for years to come.

With the backdrop of those huge expectations, doom and gloom set in when the Chinese government implemented its dreaded Operation Green Fence initiative in February 2013. The tight quality restrictions on China-bound scrap paper, exporters feared, would drop a heavy roadblock on shipments to the world’s hungriest market.

As it turned out, U.S. recovered paper exports to China did drop 7 percent in 2013 relative to 2012 – and China’s overall scrap paper imports dropped 12 percent. But today, virtually all exporters agree that the decline in volume didn’t have as much to do with Green Fence as it did with an overall drop in fiber demand by China’s containerboard mills. Most traders acknowledge that the decline was mainly attributable to global economic conditions, which reduced China’s demand for containerboard.

“Green Fence may have caused a lull in exports for a couple of weeks,” says Ranjit Baxi, Managing Director of J & H Sales International Ltd., in London. “But the most important thing was the general economic weakness in 2012 and 2013. China is the global manufacturing center. When demand for their products declines, they have less need for packaging.”

If the nation’s economic indicators are correct, recovered paper suppliers should brace for further reductions in Chinese demand.

On September 14, 2014, Business Insider.com reported the following grim financial news:

“China released a bunch of grim economic data this weekend, the worst of it being industrial production, which slowed to its lowest level since doom year 2008. It's a flashback nobody in markets wants to experience and indicates that, unless the government wants to step in, China will be shrinking for the near term at the very least.”

Demand down

The latest trade data from the Commerce Department and China Customs confirmed further declines in Chinese recovered paper imports. Through the end of October, China Customs data shows, China imported 6.5 percent less recovered paper than at the same time a year earlier. Through October of last year, China imported about 26.8 million tons. This year, Chinese scrap paper imports totaled about 25.1 million tons through October. If that pace holds, China would import, 30.8 million tons during 2014, the lowest volume since 2011, when it imported 30 million tons. China’s peak import volume was 36.4 million tons in 2012.

Looking only at imports from the U.S., the nation’s largest supplier, 2014 shipments are on pace to drop for the third consecutive year.

Projecting the nine month average out to a full year, the U.S. will export 14 million short tons of recovered paper to China in 2014. That will represent the third consecutive decline following the record of 15.8 million tons in 2011.

Despite a resounding recovery through September of this year, the prospects for recovered office paper aren’t looking much brighter than the overall scrap paper market. Based on nine-month data, U.S. exports of chemical deinking grade paper to China are on pace to top last year’s total by 126 percent – from 24,500 tons in 2013 to a projected 55,500 tons this year.

However, that volume would be 56 percent below the record 126,000 tons of deinking grades shipped to China 13 years ago, in 2001. Between 2006 and 2013, deinking grade exports to China showed a steep and continual decline. Unlike in other scrap paper grades, China is not the dominant market for office paper and other deinking grade paper. This year, India will exports about five times more deinking grade paper from the U.S. than China will, and Canada will import about three times more.

The near to mid-term future of China’s demand for imported recovered paper, exporters say, may hinge on three main variables:

  • The quality of the fiber being shipped to China;
  • The world economy and the demand for products manufactured in China;
  • The ability of China to develop its own internal collection system.

Quality

Despite the early concerns expressed following the implementation of Operation Green Fence, many by U.S. exporters today believe, in retrospect, that the measures taken by the Chinese government brought about necessary changes in the quality of material that was being packed and shipped to China. That is true, particularly, of material generated through single stream residential collection programs, they say.

“Something had to be done,” says broker Leno Bellomo, president and chief operating officer at Berg Mill Supply and Classic Fibers Inc., in Los Angeles. “Green Fence certainly caused a lot of processors to watch how deep the burden depth was on their conveyor belts and to slow down their belt speed to better manage the contaminants going through, such as resins and non-fiber products,” Bellomo said. “As a result, they ended up with some far cleaner products than they had before.”

In March 2014, one of the industry’s leading journals on paper recovery, The Paper Stock Report surveyed buyers and sellers of recovered paper about fiber quality in the post-Green Fence market. More than 77 percent of the respondents to the non-scientific, online survey agreed that the Green Fence program resulted in necessary changes in the quality of recovered fiber being packed in the U.S.

“The corporate single stream systems were run for throughput, not quality, and thus (paper with) 30 percent contamination was being sent,” one anonymous respondent commented. “China was its own worst enemy for allowing it to happen for several years before the crackdown.”

Officially, the Green Fence program is history. But the strict quality inspections remain, exporters say.

“The focus on quality has increased, not decreased,” Baxi said.

According to an exporter in New Jersey, “Some people are still afraid to ship mixed paper and other grades to China for fear of rejection.”

One processing solution was to slow down the MRF systems to allow sorters to more efficiently pull contaminants off the belts, Bellomo says.

Exporter Jimmy Yang, president of Newport CH International, of Orange, Calif., said his company took proactive measures to be sure its suppliers created cleaner bales.

“We had to crack down on our suppliers,” Yang says. “We had to hire more inspectors to go to their plants and inspect their material. We had to spend more time monitoring pictures of the bales. We had to cut off some suppliers that we were not comfortable with. Some of them have since cleaned up their acts and made their products exportable.”

Baxi said the quality issue has “eliminated Europe as the first option for China’s imported scrap paper supply.”

In fact, the percentage of China’s scrap paper exports sourced from Europe has fallen steadily, from 34 percent in 2009 to 26 percent in 2013, according to the United Nations Commodity Trade Statistics Database. During the same time the U.S. share climbed from 47 percent in 2009 to 53 percent in 2011, then receded to 45 percent last year according to the Commerce Department and China Customs. Through August 2014, those sources reveal, the U.S. share was 47 percent.

Economy

At the turn of the decade, dominant Chinese containerboard producers such as Nine Dragons Paper continued to announce new capacity projects at breakneck speed. Some U.S. scrap paper exporters eagerly interpreted those plans as infinite growth of an insatiable fiber market. Over the past several years, however, as the Chinese economy was hit with a dose of global reality, observers noted that Nine Dragons’ mills were running below capacity and suggested that the company’s growth plans may have been overly optimistic.

In June 2013, the company officially recognized that concern.

“Having considered the leading position of the Group (Nine Dragons) and the current market conditions, the Board of Directors determined that it is necessary to make temporary adjustments to the strategic development target in the coming three years,” the company said. “The Group’s focus on strategic development will shift from rapid development in the past to a prudent and sustainable development stage with further control of capital expenditure, reduction of net debt to equity ratio and enhancement of profitability.”

Chinese producers, a broker in Washington state recently told The Paper Stock Report, “overdid it on capacity. It’s no different from what the U.S. industry had always done. When times are good they keep building more and more production capacity. I think China has pretty much maxed out on demand for recovered paper imports.”

Baxi agrees.

“I think China will maintain its current imports of 30 million tons a year,” he says. “But at one time people were projecting that to go as high as 40 million tons.”

Yet to be determined, traders say, is how well China’s is able to develop its domestic scrap paper collection system. An unknown variable in that system will be the expansion of online shopping.

“The year 2013 will be remembered as the one in which China surpassed the U.S. as the world’s largest digital retail market,” according to China’s e-commerce prize, a report by Bain & Company, a Boston-based consulting firm. “Last year, Chinese e-commerce shoppers spent RMB 1.3 trillion online, a sum that has grown more than 70 percent annually since 2009 and is expected to continue on its amazing trajectory, reaching RMB 3.3 trillion by 2015.”

The trend was accentuated in September, when China’s Alibaba.com issued the largest initial public offering (IPO) ever.

“E-commerce should cause an explosion in demand for cardboard shipping boxes for domestic consumption,” observed a broker in Connecticut.

Because those boxes will remain within China’s residential collection system, it will be difficult assess whether the nation’s online shopping trend will result in a heavier demand for imported fiber.

Ken McEntee is editor and publisher of The Paper Stock Report and Paper Recycling Online, which cover the paper recycling markets. For more information, visit www.recycle.cc.

Member Login