C&B Notes

China’s National Sword Policy

China’s evolution from a fast-growing economy driven by manufacturing to a slower-growth behemoth focused on other parts of its economy is creating ripples that are hard-to-anticipate but certainly disruptive.  For example, China recently instituted a policy to exit the recycling business.  The positive and negative knock-on effects from this decision are still being determined as the global market searches for a new equilibrium.

Since the introduction of curbside household recycling in the 1980s, recycling has been promoted as the environmental answer to humanity’s growing amounts of rubbish.  It has also developed into a $200bn industry globally, according to the Bureau of International Recycling. Companies and brokers have lined up to buy this waste and turn it into new products: a kind of straw-into-gold process that can at times be remarkably profitable.  At the centre of the system is a brisk global trade in scrap materials shipped around the world.  But this year, all that changed.  On December 31, 2017, China, previously the centre of the global recycling trade, abruptly shut its doors to imports of recycled material, citing the fact that large amounts of the waste were “dirty” or “hazardous” and thus a threat to the environment.  The prices of plastic scrap collapsed, as did the price of low-grade paper.  Suddenly, the lucrative trade that had sprung up shipping recyclables around the world was in crisis.

The new policy, called the “National Sword”, was so drastic that when it was first announced many people in the industry did not believe it would actually be implemented.  China and Hong Kong went from buying 60 per cent of the plastic waste exported by G7 countries during the first half of 2017, to taking less than 10 per cent during the same period a year later.  “It really changed the world, in a way,” says Reed.  “China was the world’s biggest customer for paper and plastic.”  Using publicly available trade data, the FT has traced the exports of plastic and paper scrap from G7 countries, revealing a dramatic increase in the flows of waste into south-east Asia following the China ban.  More than three dozen industry executives, policy makers, scrap traders and environmental advocates across the US, Europe and Asia were interviewed for this piece.

The investigation found an industry undergoing unprecedented disruption, with the very purpose of recycling thrown into question.  While it has grown and often profited as consumers have become more aware of the environmental costs of landfill, the sector has long had an unsavory side.  This has been exposed by the National Sword policy, as an industry plagued by allegations of smuggling, corruption and pollution has suddenly been thrust into the spotlight.  China’s ban has also laid bare the uncomfortable economics behind household recycling and triggered a profound re-examination of the practice — one that many say was long overdue.

This is a “moment of truth” for the recycling industry, says Don Slager, chief executive of Republic Services, the second-largest waste-management company in the U.S. He estimates his group alone will lose out on $150m revenue this year due to China’s National Sword policy.  Eric Kawabata, general manager for Asia-Pacific with TerraCycle, a U.S.-based recycling company, says the China ban has created a “global crisis in plastic waste”.  Japan, where he is based, was a big exporter to China before the ban.  “Now all this trash is building up in Japan and there’s nothing to do with it; the incinerators are working at full capacity,” he says.  Technically, China does still accept some forms of scrap, but it has set such a high bar for the cleanliness of the materials that can be imported that most people in the industry refer to it as a “ban”.

In the US, many companies have had to send recycling to landfill because there is nowhere else to put it, a painful reversal after decades of growth in recycling programs.  The US exported 30 per cent less plastic scrap in the first half of 2018 compared with a year prior, according to FT data, with much of the material ending up in landfill instead.  “Recycling is like a religion here,” says Laura Leebrick, head of government affairs at Rogue Disposal & Recycling in Southern Oregon.  “It has been meaningful for people in Oregon to recycle, they feel like they are doing something good for the planet — and now they are having the rug pulled out from under them.”  After the China ban, Rogue Disposal & Recycling started to limit the types of materials it accepts from households: no more plastics (except for milk jugs), no more glass and no more mixed paper (such as junk mail and cereal boxes). With China out of the market, the cost of managing the recycling program has tripled, Leebrick says.

Globally, about half the plastic intended for recycling is traded overseas, according to a recent study in Science Advances.  That percentage is even higher on the U.S. West Coast — California exports two-thirds of the stuff tossed into household recycling bins.  Many cities that previously received revenue from their recycling programmes now have to pay haulers to dispose of the material instead.  At the beginning of 2017, a bale of low-grade mixed plastics could fetch $20 per ton in California, but a year later it cost $10 to dispose of it. The National Sword policy “challenges us to admit that recycling isn’t free,” says Zoe Heller, assistant policy director at the California state recycling agency, CalRecycle.  “What this is really bringing up for California, the US and the rest of the world is that there has to be a paradigm shift in how we think about recycling globally.”

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The ripple effects of China closing its borders to our trash are only now becoming apparent.  One consequence is a wave of new investment in scrap-processing facilities in the developed world.  Now that China no longer wants to be the destination for the world’s recycling, the burden is shifting back to more developed countries such as the U.S., EU and Japan.  “In the long term it will prove positive, because we will have to focus more on our own recycling capacity,” says Karmenu Vella, European commissioner for the environment.  He estimates that an additional 250 sorting facilities and 300 recycling plants will be needed by 2025.  For companies that make the necessary machines, sales are booming and order books have developed a backlog.  The same thing is happening in the US — and many of the investors there are Chinese. Unable to meet their demand for paper pulp or plastic pellets at home, China’s biggest recycling companies are purchasing mills or plants in America.  Nine Dragons, China’s biggest maker of paper and cardboard, recently announced it is buying two paper mills in the U.S., and plans to invest $300m in the facilities.  Other Chinese recycling companies have invested in recycling plants in Georgia, South Carolina, Alabama and Kentucky.

China’s new rules are also forcing American scrap traders and producers to do more of the dirty work themselves, to meet the very high standards that China will still accept.  George Adams, chief executive of SA Recycling, one of the biggest scrap metal traders in the U.S., says he recently installed a new line to wash aluminum waste before it is sent to China. .“You can eat off my aluminum, it is that clean,” he says.  Similar changes are taking place elsewhere: the Recology facility in San Francisco recently spent $3m installing a new optical sensor that will reduce the impurities in its bales.   As for the traders, while many have gone bankrupt or left the industry, a few have capitalized on the change. One of these is Craipeau, the Hong Kong-based trader, who has shifted his focus to selling plastic pellets — which are not covered by the waste ban — back into China.

“Overnight, China has transformed itself from being the world’s largest processor of plastic scrap to being the world’s largest importer of plastic pellets,” he explains.  Demand for plastic pellets is higher than ever because manufacturers still need them.  Craipeau currently works with a recycling plant in Indonesia, and is planning to open new ones in Poland and the U.S.  Meanwhile, many household recycling programs have found ways to continue, although sometimes in a different form. “This China thing is causing me a bit of heartburn in 2018,” says Slager, the chief executive of Republic Services.  “But on another level I am frankly elated, because it is giving us a reason to wake up and fix this part of the business.”  One priority is cleaning up the recycling stream to stop people putting dirty trash in their recycling bins, he says.

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