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Managing the impact of China’s import policies – the view from inside China

The global recovered paper sector changed radically when China changed direction. With US recycling ‘moving from turmoil to crisis,’ what is the impact inside China itself? Moore & Associates’ Susan Cornish summarises an analysis by Hong Kong based NPC Partners – 2019 China Recovered Paper Market & Policy Advisory Report.

Susan Cornish
Associate, Moore & Associates

China has been a dominant player in the global recovered paper (RCP) business for some time, consuming as much as one-third of global demand since the early 2000s.

Since China began to implement new regulations for recycled material imports in 2016-17, the US recycling industry has moved from turmoil to crisis.

Often not appreciated is that China’s new environmental policies have had considerable impact in China as well.

Still ‘to be determined’ is the impact on global RCP markets.

Impacts of China’s trade policies – on China

Impacts on recycled materials pricing and markets have been substantial for many countries, particularly the US due to the sheer volume of exports that were, prior to 2016, going to China.

However, impacts on the Chinese paper industry and RCP markets within China have also been substantial.

Some of the key trends are as follows:
• Dual pricing has emerged for all RCP grades, the price in China vs. the price outside of China, with the price inside China being substantially higher. For Old Corrugated Containers (OCC), for example, the price outside China has dropped by half while the price internal to China has been as much as $260 per ton higher than elsewhere.
• Chinese companies are experiencing much greater volatility in pulp and paperboard pricing, in addition to significantly higher prices.
• RCP imports to China declined by 17 million tonnes between 2017 and 2018, a decrease of 34%, and the share of imported RCP used in China’s paper industry declined to 16% (from 24%) over the same period.
• Imported recycled pulp has emerged as a new category, reaching about 300,000 tonnes delivered in China in 2018.

In part as a result of the above trends, total paper and board imports into China grew by 1.5 million tonnes in 2018, a 34% increase over 2017. The US remains the largest importer of RCP to China, accounting for 37% of total imports in 2018, despite a substantial decline from 2017.

Objectives of the new Chinese policies (what were they thinking?)

China’s Ministry of Environmental Protection, in combination with China Customs, has been responsible implementing the new regulations that have impacted RCP and other recycled materials so substantially.

Supply side reforms within China were announced in November 2015 and the first central government environmental inspections were introduced in January 2016.

The programme codenamed Blue Sky followed an earlier program called Green Fence, but with much more far-reaching changes.


Recent Publications from the Chinese Ministry of the Environment
• “Imported Waste Management Catalog” (2017)
• “Directory of Prohibited Solid Waste”
• “Provisions of the ‘Administration of Environmental Protection’ of Restricted Imports of Solid Waste as Raw Materials”
• “Provisions of the ‘Administration of Environmental Protection’ of Restricted Imports of Imported Waste Paper”
• Updated “Environmental Protection Control Standard for Imported Solid Wastes as Raw Materials – Waste and Scrap Paper or Paperboard” (2017).

The main objectives of China’s policy reforms have been to tackle overcapacity in the paper industry and reduce environmental pollution within China.

Prohibiting the entry of foreign ‘waste’ into China has been accompanied by reform of the structures and processes for solid waste importation.

The goal is to greatly reduce the types and quantities of imports and gradually replace imports with domestic substitutes by the end of 2019.

Major changes based on the new regulations include:
• A ban on imports of Mixed Paper;
• Much reduced tolerance for prohibitives in all RCP grades;
• Exporters must now have a minimum of 50,000 tonnes of paper production Objectives of the new Chinese policies (what were they thinking?)

China’s Ministry of Environmental Protection, in combination with China Customs, has been responsible implementing the new regulations that have impacted RCP and other recycled materials so substantially.

Supply side reforms within China were announced in November 2015 and the first central government environmental inspections were introduced in January 2016.

The programme codenamed Blue Sky followed an earlier program called Green Fence, but with much more far-reaching changes.

Recent Publications from the Chinese Ministry of the Environment
• “Imported Waste Management Catalog” (2017)
• “Directory of Prohibited Solid Waste”
• “Provisions of the ‘Administration of Environmental Protection’ of Restricted Imports of Solid Waste as Raw Materials”
• “Provisions of the ‘Administration of Environmental Protection’ of Restricted Imports of Imported Waste Paper”
• Updated “Environmental Protection Control Standard for Imported Solid Wastes as Raw Materials – Waste and Scrap Paper or Paperboard” (2017).

The main objectives of China’s policy reforms have been to tackle overcapacity in the paper industry and reduce environmental pollution within China.

Prohibiting the entry of foreign ‘waste’ into China has been accompanied by reform of the structures and processes for solid waste importation.

The goal is to greatly reduce the types and quantities of imports and gradually replace imports with domestic substitutes by the end of 2019.

Major changes based on the new regulations include:
• A ban on imports of Mixed Paper;
• Much reduced tolerance for prohibitives in all RCP grades;
• Exporters must now have a minimum of 50,000 tonnes of paper production capacity in order to be eligible for Import Permits; and therefore
• Brokers are no longer eligible to export to China.

China continues to develop new policy frameworks to tackle pollution and improve environmental protection, and is restructuring its ministries in anticipation of future impacts on the recycling and paper industries.

In June 2018, China’s State Council announced a new goal of zero ‘solid waste’ imports by year 2020.

Worthy of note is that the exact definition of ‘solid waste’ in these new regulations is not yet clear.

It is too soon to say the extent to which any grades of RCP will remain acceptable for importation.

The Chinese government has desired to phase out the lowest-quality RCP grades because of high levels of contamination and to monitor the scale of imports much more closely.

In the past, paper companies obtained annual quota volumes for imports in the first few months of each the year.

With the new regulation, paper companies must apply for quotas on a quarterly basis which increase the time required for the process for both companies and government import managers.

The reduced number of RCP Import Permits that has resulted has effectively limited the volume of imports.

In October 2018, China’s Ministry of Ecology and Environment announced a new organisational structure that includes a new Department of Solid Waste & Chemicals.

The Inspection and Quarantine Unit that usually oversees import inspections will now be part of China Customs.

The new government units and consolidations will take some time to put in place so further change will not be immediate.

For example, the leader and team members for a new group focusing on ‘waste identification’, or distinguishing waste from renewable resources, has not yet been assigned.

Companies and associations are continuing to communicate with the Government at all levels, especially the new departments and leaders who are in place, in order to stay informed of future policy changes in a timely way.

New opportunities in RCP markets

These ongoing changes to policy in China have been monitored closely around the globe, in RCP sectors as well as other recycled materials.

Yet, there is limited understanding of Chinese government policy motivations and expectations for the future vary considerably, contributing to volatility in RCP pricing, trade, and investment flows for all involved.

In the medium – term, the following trends are evident:
• The Chinese government has more work to do to define the nature of ‘waste paper’ that should not be imported vs. what is recyclable ‘green’ fibre and can be imported;
• Chinese investment overseas is likely to expand in search of additional sources of fibre;
• As Mixed Paper is phased out, it is expected that use of virgin fibre will increase in China.
Given the new landscape, what are productive strategies for RCP companies outside of China? It is still possible that the Chinese government may redefine RCP standards at a later point in time so that some of what is now considered ‘waste paper’ could come to be considered a recyclable resource and acceptable for importation. However, until then:
• Imported ‘waste’ has been identified as part of China’s pollution problems. Understanding the perspective of Chinese policymakers, both at the top levels and at the implementation level, will be critical to being prepared for future changes and planning for future impacts.
• While previous RCP markets have changed, new opportunities are opening up.As the domestic recycling system is being upgraded in China, there is great opportunity for exporters to provide recycling equipment, software, and other related business functions to China.
• Alternative types of fibre imports are beginning to emerge such as recycled pulp, whether RCP or virgin fibre. As Bill Moore, president of Moore & Associates said: “Many companies in North America and Europe believe that China’s RCP import restrictions are the ‘end game’ and have written off China as a market in general. The implications of RCF pulp exports – along with ongoing growth in the containerboard sector — remain an open question.”
• Growing foreign investment from Chinese paper mills is beginning to change global RCP trade flows.
• While RCP exports to China may be down, growth in China’s imports of non-RCP paper and board has been significant.

Finally, China will need additional fibre beyond what it can supply domestically. NPC Partners’ new report provides multiple quantitative scenarios for OCC, ONP, Mixed Paper, containerboard, and recycled pulp. These will give exporters extensive data and insights from which to assess RCP demand and align with changing fibre market needs in China.