Identifier
Created
Classification
Origin
09GUANGZHOU32
2009-01-16 08:50:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Guangzhou
Cable title:
Economic Downturn Takes Guangdong's Recycling Industry for
VZCZCXYZ0000 RR RUEHWEB DE RUEHGZ #0032/01 0160850 ZNR UUUUU ZZH R 160850Z JAN 09 FM AMCONSUL GUANGZHOU TO RUEHC/SECSTATE WASHDC 0118 INFO RUEHGZ/CHINA POSTS COLLECTIVE 0054 RUEHBJ/AMEMBASSY BEIJING 0055 RHMFIUU/HQ EPA WASHINGTON DC 0012 RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0041 RUEATRS/DEPT OF TREASURY WASHINGTON DC 0037 RHEHAAA/NSC WASHDC 0006 RUEAIIA/CIA WASHDC 0054 RUEKJCS/DIA WASHDC 0054 RHHMUNA/HQ USPACOM HONOLULU HI
UNCLAS GUANGZHOU 000032
SENSITIVE
SIPDIS
STATE FOR EAP/CM, OES/PCI
STATE ALSO PASS USTR FOR CHINA OFFICE
STATE PASS TO ENVIRONMENTAL SCIENCE & TECHNOLOGY COLLECTIVE
EPA FOR OFFICE OF INTERNATIONAL AFFAIRS
E.O. 12958: N/A
TAGS: EFIN SENV PGOV SOCI ECON CH
SUBJECT: Economic Downturn Takes Guangdong's Recycling Industry for
a Loop
UNCLAS GUANGZHOU 000032
SENSITIVE
SIPDIS
STATE FOR EAP/CM, OES/PCI
STATE ALSO PASS USTR FOR CHINA OFFICE
STATE PASS TO ENVIRONMENTAL SCIENCE & TECHNOLOGY COLLECTIVE
EPA FOR OFFICE OF INTERNATIONAL AFFAIRS
E.O. 12958: N/A
TAGS: EFIN SENV PGOV SOCI ECON CH
SUBJECT: Economic Downturn Takes Guangdong's Recycling Industry for
a Loop
1. (U) Summary. In this economy, even the recycling industry is
getting "trashed." For much of the last decade, Guangdong's
recycling sector has boomed, but the global economic downturn is
hurting the industry, leaving many firms struggling to stay afloat.
A combination of declining consumption and dwindling profit margins
has caused many of Guangdong's recycling enterprises to either
drastically reduce scrap import volumes or shutdown operations
completely. Some industry leaders, however, are confident that a
strengthened government commitment to the environment, better
understanding of the value and importance of recycling, a future
increase in domestic market demand and the growth of corporate
social responsibility campaigns will carry the industry through the
financial storm. End Summary.
--------------
Big Business in Guangdong
--------------
2. (U) Guangdong Province has been at the forefront of China's
recycling industry. Driven by resource shortages and environmental
degradation, the Central Government has placed a high priority on
expansion of the industry, making China the world's largest importer
of waste. Importing waste mostly from U.S. and European markets,
Guangdong ranks number one among China's provinces in imports and
processing of scrap non-ferrous metals, such as copper and aluminum.
Guangdong's Nanhai City alone account for 15% of China's scrap
metal imports. Guangdong supplies scrap metal, paper, and plastic
to over 1,000 international and domestic companies throughout China
looking to cut costs and/or promote environmental protection,
including Toyota, Procter and Gamble, and Foxconn. In 2007, the
province's recycling industry brought in well over RMB 12 billion
(USD 1.8 billion).
--------------
Price Drops, Profit Shrinks
--------------
3. (U) After years of rapid growth, the industry is now suffering
due to a declining global demand for consumer goods and raw
materials and, as a result, falling commodity prices. Recycling
firms are most concerned about the demand for scrap metals, the most
profitable material, followed by paper and plastic respectively. As
resources traded on the commodities market, metals are highly
sensitive to market fluctuations. Ironically, much of the falling
global demand is in direct response to China's domestic market,
which stands as the top global consumer of copper, and metals used
in packaging and infrastructure.
4. (SBU) Lower demand leads to lower prices, and the falling price
of scrap metal has caused many Guangdong enterprises to lose money
on contracts signed earlier in the year. According to Chairman Li
Yuanfeng of Guangzhou Wanluda Group, a major producer of recycled
materials located in Guangdong's Nanhai City, it's standard practice
for recycling enterprises to sign contracts with exporters three
months to one year prior to the delivery date. Most importing firms
also have to pay a 20% down payment. But sharp price drops forced
many companies to cancel contracted orders. Chen Jiehong, Secretary
General of Nanhai Recycling Business Association, explained that
prices for both copper and aluminum scrap reached a historic peak at
RMB 82,000 per ton in 2007. By September 2008, the price dropped to
RMB 58,000 per ton, and another 60% to RMB 20,000 by October 2008,
the height of the crisis. Most companies are only able to recover
60% of their down payment when they cancel an order. For other
companies, the alternative was to negotiate a discounted rate with
exporters, requiring full payment upfront, with no guarantee that
the value of the scrap will not drop again before delivery.
--------------
Suspending Operations
--------------
5. (SBU) Sharp price drops have also led to wide-scale suspension
of operations, according to Chen. Most companies have halted at
least a portion of their processing, including Nanhai's largest
recycling enterprise, Huimei Hongfa, because they are not able to
move inventory or make a profit. Buyers are simply unwilling to pay
the pre-downturn price. Guangzhou Wanluda's Chairman Li pointed out
that because the dramatic declines in commodity prices have made
profit margins so thin, he decided to reduce his company's inventory
to the lowest level possible to minimize risk. Chen told us that
several managers have stopped importing scrap, and are taking a
'wait-and-see' attitude toward the market until after the Chinese
New Year.
--------------
Aiming to Be Green
--------------
6. (SBU) The Chinese government has enacted an extensive system of
regulations intended to ensure that the recycling industry enhances
environmental protection in south China. According to Chen,
potential scrap material imports are categorized into a three-tier
system: 1) 'not permitted,' including heavy-polluting items such as
electronic waste and computer parts, 2) 'automatically approved,'
which include items that do not pose a serious threat to the
environment, and 3) 'need to be reported and approved.' Many
enterprises in Guangdong import scrap materials that fall under the
'needs approval' category. For these, the Central Government
approves each enterprise's shipment requests prior to import,
specifies which ports can receive such shipments, and controls where
and how the scrap material is processed. Chen also noted that the
regulations require enterprises to use recycled water in the
production process; even rain water at the recycling facility must
be collected and treated before it is released. In addition, local
enterprises are not permitted to import more than 5% of
non-recyclable scrap as a part of any given shipment.
8. (U) Additional steps are taken in Nanhai with its heavy
concentration of recycling enterprises. The Nanhai Recycling
Business Association operates waste collection stations; waste is
subsequently used at local garbage power plants. Useless waste is
separated into hazardous, industrial and domestic waste categories,
and taken to landfills. (Note: Our contacts were reluctant to
elaborate on the volume of waste dumped at landfills and relevant
environmental safeguards applied to that waste. End note.) Local
enterprises take additional steps to prevent noise pollution and
excess air pollution caused by dust created during scrap processing.
Local government also conducts annual audits, during which a
company must score 80% in order to remain in operation. Enterprises
that pass must also undergo a secondary audit.
--------------
Future Projections: Growth in the Industry
--------------
9. (SBU) The most significant challenge that legitimate recycling
enterprises face is fighting the temptation to prioritize profit
over environment, according to Guangzhou Wanluda's Li. He commented
that it was relatively easy for enterprises to ignore local
environmental laws, some operating completely illegally in
Guangdong, because local officials do not have the capacity to
effectively regulate or monitor the recycling industry. Illegal
operations are more profitable as management often cuts corners,
dumps polluted waste, and in general fails to adhere to often costly
environmental regulations. Li told us that many
environmentally-friendly practices, such as treating solid waste in
compliance with local law, are costly and decrease profit margins.
10. (SBU) Looking toward the future of the industry, Chen said 'the
future is bright, but the road has twists and turns.' Wanluda's Li
adds that the foundation of the recycling industry in Guangdong is
changing. According to Li, business-owners initially got into the
business to make quick money. Now, the industry is attaching more
importance to environmental protection and linking with corporate
partners to promote corporate social responsibility (CSR). Local
government also supports the industry through assistance with land
acquisition and funding subsidies. Li predicts that in light of the
11th Five-Year Plan, and Premier Wen Jiaobao's "Pollution Prevention
and Energy Efficiency" taskforce, it will become more and more
mainstream for both domestic and foreign companies to utilize
recycled material. However, he acknowledged that the recycling
industry has a long way to go and that foreign media and other
international actors will need to continue raising awareness about
the benefits of recycling.
GOLDBERG
SENSITIVE
SIPDIS
STATE FOR EAP/CM, OES/PCI
STATE ALSO PASS USTR FOR CHINA OFFICE
STATE PASS TO ENVIRONMENTAL SCIENCE & TECHNOLOGY COLLECTIVE
EPA FOR OFFICE OF INTERNATIONAL AFFAIRS
E.O. 12958: N/A
TAGS: EFIN SENV PGOV SOCI ECON CH
SUBJECT: Economic Downturn Takes Guangdong's Recycling Industry for
a Loop
1. (U) Summary. In this economy, even the recycling industry is
getting "trashed." For much of the last decade, Guangdong's
recycling sector has boomed, but the global economic downturn is
hurting the industry, leaving many firms struggling to stay afloat.
A combination of declining consumption and dwindling profit margins
has caused many of Guangdong's recycling enterprises to either
drastically reduce scrap import volumes or shutdown operations
completely. Some industry leaders, however, are confident that a
strengthened government commitment to the environment, better
understanding of the value and importance of recycling, a future
increase in domestic market demand and the growth of corporate
social responsibility campaigns will carry the industry through the
financial storm. End Summary.
--------------
Big Business in Guangdong
--------------
2. (U) Guangdong Province has been at the forefront of China's
recycling industry. Driven by resource shortages and environmental
degradation, the Central Government has placed a high priority on
expansion of the industry, making China the world's largest importer
of waste. Importing waste mostly from U.S. and European markets,
Guangdong ranks number one among China's provinces in imports and
processing of scrap non-ferrous metals, such as copper and aluminum.
Guangdong's Nanhai City alone account for 15% of China's scrap
metal imports. Guangdong supplies scrap metal, paper, and plastic
to over 1,000 international and domestic companies throughout China
looking to cut costs and/or promote environmental protection,
including Toyota, Procter and Gamble, and Foxconn. In 2007, the
province's recycling industry brought in well over RMB 12 billion
(USD 1.8 billion).
--------------
Price Drops, Profit Shrinks
--------------
3. (U) After years of rapid growth, the industry is now suffering
due to a declining global demand for consumer goods and raw
materials and, as a result, falling commodity prices. Recycling
firms are most concerned about the demand for scrap metals, the most
profitable material, followed by paper and plastic respectively. As
resources traded on the commodities market, metals are highly
sensitive to market fluctuations. Ironically, much of the falling
global demand is in direct response to China's domestic market,
which stands as the top global consumer of copper, and metals used
in packaging and infrastructure.
4. (SBU) Lower demand leads to lower prices, and the falling price
of scrap metal has caused many Guangdong enterprises to lose money
on contracts signed earlier in the year. According to Chairman Li
Yuanfeng of Guangzhou Wanluda Group, a major producer of recycled
materials located in Guangdong's Nanhai City, it's standard practice
for recycling enterprises to sign contracts with exporters three
months to one year prior to the delivery date. Most importing firms
also have to pay a 20% down payment. But sharp price drops forced
many companies to cancel contracted orders. Chen Jiehong, Secretary
General of Nanhai Recycling Business Association, explained that
prices for both copper and aluminum scrap reached a historic peak at
RMB 82,000 per ton in 2007. By September 2008, the price dropped to
RMB 58,000 per ton, and another 60% to RMB 20,000 by October 2008,
the height of the crisis. Most companies are only able to recover
60% of their down payment when they cancel an order. For other
companies, the alternative was to negotiate a discounted rate with
exporters, requiring full payment upfront, with no guarantee that
the value of the scrap will not drop again before delivery.
--------------
Suspending Operations
--------------
5. (SBU) Sharp price drops have also led to wide-scale suspension
of operations, according to Chen. Most companies have halted at
least a portion of their processing, including Nanhai's largest
recycling enterprise, Huimei Hongfa, because they are not able to
move inventory or make a profit. Buyers are simply unwilling to pay
the pre-downturn price. Guangzhou Wanluda's Chairman Li pointed out
that because the dramatic declines in commodity prices have made
profit margins so thin, he decided to reduce his company's inventory
to the lowest level possible to minimize risk. Chen told us that
several managers have stopped importing scrap, and are taking a
'wait-and-see' attitude toward the market until after the Chinese
New Year.
--------------
Aiming to Be Green
--------------
6. (SBU) The Chinese government has enacted an extensive system of
regulations intended to ensure that the recycling industry enhances
environmental protection in south China. According to Chen,
potential scrap material imports are categorized into a three-tier
system: 1) 'not permitted,' including heavy-polluting items such as
electronic waste and computer parts, 2) 'automatically approved,'
which include items that do not pose a serious threat to the
environment, and 3) 'need to be reported and approved.' Many
enterprises in Guangdong import scrap materials that fall under the
'needs approval' category. For these, the Central Government
approves each enterprise's shipment requests prior to import,
specifies which ports can receive such shipments, and controls where
and how the scrap material is processed. Chen also noted that the
regulations require enterprises to use recycled water in the
production process; even rain water at the recycling facility must
be collected and treated before it is released. In addition, local
enterprises are not permitted to import more than 5% of
non-recyclable scrap as a part of any given shipment.
8. (U) Additional steps are taken in Nanhai with its heavy
concentration of recycling enterprises. The Nanhai Recycling
Business Association operates waste collection stations; waste is
subsequently used at local garbage power plants. Useless waste is
separated into hazardous, industrial and domestic waste categories,
and taken to landfills. (Note: Our contacts were reluctant to
elaborate on the volume of waste dumped at landfills and relevant
environmental safeguards applied to that waste. End note.) Local
enterprises take additional steps to prevent noise pollution and
excess air pollution caused by dust created during scrap processing.
Local government also conducts annual audits, during which a
company must score 80% in order to remain in operation. Enterprises
that pass must also undergo a secondary audit.
--------------
Future Projections: Growth in the Industry
--------------
9. (SBU) The most significant challenge that legitimate recycling
enterprises face is fighting the temptation to prioritize profit
over environment, according to Guangzhou Wanluda's Li. He commented
that it was relatively easy for enterprises to ignore local
environmental laws, some operating completely illegally in
Guangdong, because local officials do not have the capacity to
effectively regulate or monitor the recycling industry. Illegal
operations are more profitable as management often cuts corners,
dumps polluted waste, and in general fails to adhere to often costly
environmental regulations. Li told us that many
environmentally-friendly practices, such as treating solid waste in
compliance with local law, are costly and decrease profit margins.
10. (SBU) Looking toward the future of the industry, Chen said 'the
future is bright, but the road has twists and turns.' Wanluda's Li
adds that the foundation of the recycling industry in Guangdong is
changing. According to Li, business-owners initially got into the
business to make quick money. Now, the industry is attaching more
importance to environmental protection and linking with corporate
partners to promote corporate social responsibility (CSR). Local
government also supports the industry through assistance with land
acquisition and funding subsidies. Li predicts that in light of the
11th Five-Year Plan, and Premier Wen Jiaobao's "Pollution Prevention
and Energy Efficiency" taskforce, it will become more and more
mainstream for both domestic and foreign companies to utilize
recycled material. However, he acknowledged that the recycling
industry has a long way to go and that foreign media and other
international actors will need to continue raising awareness about
the benefits of recycling.
GOLDBERG