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Big Debate - UK squares up to the dragon

For the UK’s waste and recycling sector, the state of the Chinese economy is crucial. But the country’s growth is stalling and it is getting tougher for exporters to hit materials standards. Global market watchers David Sher and Dr Karl S Williams consider whether the situation in the Far East is a cause for concern or a continuing opportunity

Karl Williams

KW: I have recently returned from a visit to China where I witnessed firsthand the new emphasis on recycling. I visited the large scale sorting plant at Xiaowuji in Beijing. It is one of the new large scale automatic sorting facilities in China built on German know-how. As China strives to meet the ambitious target which is part of the 12th Five-year-plan (2011-2015) more such plants will be required. What will be the opportunity for the UK if any? As China begins to develop its own recycling markets and build a more integrated waste management system it will look to create a circular economy via a sustainable development pattern. China’s internal economic market is enormous and growing. This is creating wealth and a population with a disposable income. Consequently this economic growth is linked to an increase in waste generation.

Raw materials are key to China’s success but as its own recycling markets increase it will depend less and less on imports. China’s appetite for high grade recycled material may reduce as its own internal markets meet manufacturing demand. This would not necessarily impact on the UK recycling industry producing high grade recyclates as there are buoyant markets at home and elsewhere. However, any loss of a market is not good. An area that would be detrimentally affected would be the lower grade recyclate markets.

The China Custom Inspectorate are making it more difficult for low grade material to enter her borders. As China’s waste industry automates, the family-concern businesses with hand pickers sorting through imported low grade recyclates will disappear. China is striving to produce high quality recyclate material for modern recycling technology.

David Sher

DS: There is no doubt that China has increased its recycling ambitions, and some of the investment in modern high-tech sorting and reprocessing facilities there is truly astounding. There will always be those who view any change in the market as a potential threat, but if you look at this particular situation a little closer, you will also see a huge opportunity for the waste and resource management industry here. No doubt if targets are achieved, volumes of China-sourced recyclate will increase, and increase fast. But most forecasts suggest Chinese demand for raw materials will increase by even more in absolute terms, reinforcing existing demand for imports of recyclates from across the globe. Yet the biggest opportunity for the industry has nothing to do with increasing volumes of imports.

As the world’s biggest manufacturing economy (any day now), China’s shift towards greater use of recycled material will catalyse greater use of recycled material by manufacturers wherever they’re located, and in doing so, help integrate recyclates into global supply chains. This could have significant consequences for the value and depth of recyclate markets and so represents a huge opportunity for those in the waste and resource management industry.

And we haven’t touched the surface of what this could be mean for those exporting technology, intellectual property and related services to China, or those UK companies with global ambitions…

Karl Williams

KW: The rapid growth that we have been witnessing in China may be over and this optimistic view of opportunity and riches not living up to the reality. China has never been one for being honest and hides behind rhetoric rather than substance. And the cracks are showing in its economy with reports of its own massive credit crisis. China’s market recovered quickly after 2008, thanks to government economic stimulus measures and incentives to boost consumption but this is not an option in 2012. This, coupled with the world economic crisis would result in overcapacity for manufacturing and recyclates (with the intended higher recycling targets having been at least partly achieved). With China pressing forward with its desire to recycle more and be more energy self reliant, it will expand its internal market to the detriment of imports.

China has a large investment in waste-to-energy plants and is expected to increase its capacity even further to 40 Mt over the next 4 years. China has its own internal engineering companies which can provide much of the technology. The expanding waste management infrastructure will lead to improved recycling and recovery, therefore internally China will be in an even stronger position. China’s development in domestic collection systems coupled with higher internal consumption of materials, is leading to increased supply of domestic recovered materials. If China looks more inwardly then it may not be the desired catalyst for a global recyclate market. As China’s economy is protectionism with various hoops and hurdles it puts in place, the land of opportunity for exporting technology and IP may not be the gold rush envisaged.

David Sher

DS: Karl seems to be very bearish on China’s future, which is a sentiment I happen not to agree with.  There may be cycles in the short term but I truly believe the emergence of China (and India) into the developed world will prove to be the dominant economic theme of our generation and the next, and a one way trajectory.  But playing devil’s advocate, assume China does collapse, demand for goods plummets and a (bigger) world economic crisis ensues with substantial overcapacity for manufacturing and reprocessing resulting as Karl suggests. The markets will still remain competitive and integrated.  Some reprocessing and manufacturing capacity somewhere would have to close.

The reality is those that are forced to close will probably be in developed service-led economies.  The ‘last man standing’ will be those facilities which are highest tech, lowest cost, and most efficient.  Judging from existing trends in global manufacturing, I wouldn’t bet against these being located in China.

So even in Karl’s doomsday scenario, I still believe that, alongside supporting our domestic market, improving trade with China (and other manufacturing-led emerging economies) and seeking to entrench UK-sourced recyclate into these economies is one of the most important tools we have to protect against downside risk and to preserve a robust future for our ability to recycle the materials we discard.

Karl Williams

KW: I applaud David’s optimism that UK businesses can be supported by China. However, China will have the luxury of being more choosy over the types of recyclate that it will receive. The inclusion of India as an additional market does skew the argument and one could look towards the whole of Asia as a burgeoning market. There are other emerging markets in Asia and it may be that these offer greater opportunities for UK recycling.

I am not saying that opportunities and new markets don’t exist in China, just that there are better places to look with a more guaranteed long-term prospect. If we look at what the UK can offer China or more importantly what China wants from us, high tech solutions are always suggested as though this is China’s greatest need. Much of our technology in the UK is European and I have already seen German technology being used in China. But it is important to realise that China is becoming a dominant market and will be looking to export her own technology. I know of one waste transfer station which was designed and constructed by China’s Aerospace Architectural Design and Research Institute. It may not be long before we see China exporting to emerging Asian markets. And quality and cost will be paramount in our successful approach to this challenge.

China is still a commercial opportunity, for it is possible to find niches and areas in any market. However, China’s changing attitude to waste will drive the recycling market and since the introduction of its “Management Regulation of Imported Solid Waste” last year, imports to the Zhujiang Delta, “the backbone of solid recycling industry” has seen a decrease in imports. This is causing the waste processors in China to change how they operate and is aiding the development of the internal recycling market. Many companies are seeing this as a way of invigorating their own industry. China is changing and it is building its own markets such as the new resource recycling market in Tibet. The future opportunities for UK business are uncharted territory. Fortune in this case may favour the cautious.

David Sher

DS: For me the key point is that these markets work like most commodity markets, they’re driven by supply and demand. A combination of legislation, landfill tax, and environmental ambition means that the UK will generate a supply of recyclate and that supply is increasing. Unless government policy changes drastically in a large number of areas, we are unlikely to have sufficient domestic capacity to reprocess all of it, so some must be exported if it is to be recycled into new products. The countries which manufacture more goods than they consume - China is a perfect example - will typically have demand for that material that exceeds what they can supply domestically, even as their waste management infrastructure develops. And as our collection and sorting infrastructure matures, UK recyclers are increasingly price competitive on world markets.

The transition that China is embarking on will help catalyse the global ‘circular economy’. Yes they will seek to find outlets for their domestic recycling, but we mustn’t be overly afraid of a little competition. This isn’t a zero sum game. The recycling industry is at the heart of sustainable development and the whole industry is growing, globally. As manufacturers are increasingly persuaded to look at recyclates rather than virgin materials, opportunities will be created for many, not just the Chinese. Increasing depth in world recyclate markets can and should be a positive for those UK recycling industry.

Profile - David Sher

Sher joined the Environmental Services Association in 2010 as the policy advisory for materials and energy recovery. He works closely with industry and government on a number of cross-industry initiatives. Prior to joining ESA, David worked at the Environmental and Energy Study Institute in Washington DC, advising US Congress on energy and climate change policy, and at Dresdner Kleinwort, the investment bank, financing energy, infrastructure and utilities projects. David holds a BA and MMath in Mathematics from Cambridge University and MSc in Environmental Decision Making.

Profile - Karl S Williams

Dr Karl S Williams is director for the Centre for Waste Management at the University of Central Lancashire (UCLan). He has been involved with the waste industry for over 15 years as an industrialist and as an academic. As both a Chartered Engineer and a Chartered Waste Manager he has extensive knowledge of the technical, legislative and financial implications of converting waste to a resource. He is the programme leader at UCLan a range of MSc management courses including sustainable waste, carbon and resources and the urban environment.

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