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 
 
¶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