Market Status Report:
Secondary Material Export Markets

Table of Contents

Preface

I.  Introduction

II.  Supply and Demand for Exportable Secondary Materials

• Iron and Steel Scrap
• Recovered Paper
• Plastic Scrap
• Aluminum Scrap
• Glass Scrap
• Used Textiles

III.  Primary Issues Relating to Exports of Secondary Materials

• Relative Value of Resources
• Market Volatility
• Transportation
• Hazardous Waste
• Complexity of Export Marketing

IV.  Strategies Relating to Exports of Secondary Materials

V.  Summary

I.  Introduction

International trade is a major force in California's economy, currently accounting for nearly 25 percent of the state's economy. With major port facilities in the San Francisco and Los Angeles, California is a major gateway for products entering and leaving the United States. Many goods moving through California ports, such as industrial and postconsumer secondary materials, originated in other states. According to the California Trade and Commerce Agency, California exports of secondary materials have typically exceeded $1 billion annually.

This report provides an overview of California's export markets for secondary materials. The market information for these materials typically does not explicitly separate postconsumer materials. However, since the majority of these materials are postconsumer, reviewing the general trends and issues affecting secondary material markets provides a useful tool for understanding postconsumer material exports.

Exports of finished goods made from recycled postconsumer materials will not be discussed in detail in this report. Exports markets for these products involve the same types of issues faced by marketers of products made from virgin materials, such as dealing with U.S. and foreign trade regulations, committing sufficient resources to determine the best prospects for overseas markets, and dealing with the more complicated insurance, transportation, and contractual issues of export sales.

A major issue surrounding export of secondary materials involves the drawbacks of shipping industrial feedstocks overseas when they could be used to produce higher-value goods in the United States. While this debate is important, the current reality of secondary material markets in California is that large quantities of material from California and other states are exported through California because transportation costs to domestic markets are prohibitive, domestic markets are not available, or foreign markets provide better prices than domestic markets.

Overseas export markets for secondary materials have played an important role in markets for California's postconsumer materials by absorbing large quantities of the secondary materials generated in California that local recycling facilities do not provide demand for. With most secondary materials characterized by high volumes and low values, ready access to overseas markets has allowed California local governments to collect some types of materials that other states could not afford to pursue. The most important secondary materials export markets include those for recovered paper, scrap metal, scrap plastics, and scrap aluminum.

Export markets for secondary materials have historically involved significant demand and price swings. During the peaks of these cycles, competition for materials can become fierce and export prices can significantly outstrip prices offered by domestic buyers. These market swings are controlled by a number of factors, including foreign economic conditions, currency exchange rates, availability of cargo shipping containers, and stockpiling of materials by foreign buyers.

Successful marketing under changing conditions requires understanding and staying informed of changes in the markets. Nearly all collectors (e.g., curbside collection programs, material recovery facilities) and intermediate processors (e.g., firms which prepare materials by baling, grinding, or shredding materials) of postconsumer materials choose brokers, export management companies, or other intermediaries to facilitate their export sales. Brokers typically handle most aspects of the transaction, from arranging freight, making sure specifications are met, arranging Letters of Credit, and preparing port and customs documentation. Some large brokers are also processors who buy substantial volumes to supply their U.S. recycling facilities and also broker export shipments when warranted by market conditions. Many export transactions also involve the services of freight forwarders, who oversee moving cargo to an international destination and can handle transport, insurance, financing, and processing of documents necessary for the transaction and movement of goods. In general, export transactions are significantly more involved than similar domestic transactions.

Most of California's secondary material exports leave by ocean freight in cargo containers through one of the three federal customs districts in California. These districts track all port, air, truck, and rail exports within the district. The Los Angeles Customs District stretches from Ventura to Orange County, and in 1994 became the nation's largest gateway for foreign trade, with over $146 billion in exports in 1994. The San Francisco and San Diego customs districts cover the remaining northern and southern parts of the state. San Francisco exports approximately half as many secondary materials as Los Angeles and San Diego about one quarter as many.

II.  Supply and Demand for Exportable Secondary Materials

Significant supplies of secondary materials collected in California for recycling are exported internationally. However, U.S. Census Bureau export statistics do not indicate the state of origin for export shipments, making it difficult to determine the quantity of California-generated secondary materials available for export. In general, in-state market demand for many secondary materials such as paper and plastic are insufficient to handle local supplies. Lower ocean freight rates versus overland shipping to distant domestic markets, combined with cycles of strong demand from overseas markets have tended have shaped export markets into the "escape valve" for California-generated secondary materials.

Demand for California's secondary material exports is dominated by the rapidly growing economies of Asia. Korea and Japan account are the largest markets for California's secondary materials, each exporting over $130 million in materials during 1994. Other important markets for California secondary materials include Taiwan, Hong Kong, China, India and Mexico. During 1994, the total export value of the California secondary materials discussed in this paper exceeded $700 million.

These countries use both American and European secondary materials as feedstocks for their industries. In many of these countries where natural resources are scarce, imported secondary materials play a vital role in supplying industrial operations. The remainder of this section will discuss historical and anticipated demand for selected secondary materials exported from California port districts. The tables summarize U.S. Census Bureau export data derived from shipper's export declarations from 1989 through November 1995.

Iron and Steel Scrap

Scrap iron and steel is the largest and most well-established commodity of secondary material scrap exported from California. In 1994, approximately 25 percent of U.S. scrap iron and steel exports were shipped from California port districts with a total value of $337 million. Korea has been the dominant market for these materials, accounting for 45 percent (632,000 tons) of California's market.

Other significant markets have included China, India, Japan, and Malaysia. Although there are many different types of iron and steel scrap, the principle types exported from California are listed below.

Table of Exports of Selected Ferrous Scrap from California Port Districts
(thousands of metric tons)

Recovered Paper

There is an active and well-established commodity market for waste paper exports. In 1994, approximately 30 percent of U.S. waste paper exports were shipped from California port districts with a total value of $230 million. China, Japan,South Korea, and Taiwan are the primary markets for California waste paper exports. Lack of forest resources makes these countries extremely dependent on waste paper as a raw material to manufacture paper and paperboard.

Table of Exports of Recovered Paper from California Port Districts
(thousands of metric tons)

California waste paper exports dropped during the early 1990s due to high ocean freight rates, an increase in European wastepaper exports, and reduced U.S. merchandise imports causing a shortage of shipping containers for exports. However, during 1994 and 1995 waste paper exports began increasing, especially for OCC. This increase in waste paper exports resumed both the national and California trends of 5 to10 percent annual growth in waste paper exports since the early 1970s.

Most industry analysts believe demand for U.S. waste paper will hold steady or increase slowly throughout the remainder of the decade as Asian economies continue to grow. Listed below are market highlights for several of the waste paper grades.

Used corrugated containers (OCC). Since 1990, South Korean and Chinese demand for California exports of OCC have increased rapidly, nearly matching the 20 to30 percent market shares of Japan and Taiwan. Thailand has emerged as a small but rapidly growing market, capturing nearly 5 percent of California OCC exports compared to 1 percent in 1989.

Newsprint (ONP). Taiwanese and South Korean markets each purchase about 20 to 30 percent of California's newsprint exports. Growing markets in Japan and Thailand have primarily accounted for the increase in newsprint exports since 1989.

Mixed paper. Although Taiwan has consistently dominated 40 to 50 percent of this market, the remainder of the mixed paper market has shifted significantly since 1989. Japanese markets have nearly evaporated since 1991, replaced to a large extent by rapidly growing markets in South Korea, China, and India.

Deinking. As U.S. domestic deinking mill capacity has increased, California exports of deinking-grade waste paper have been decreasing. Korea continues to import approximately half of California's deinking-grade exports, while Japanese and Taiwanese markets have decreased rapidly.

Plastic Scrap

Plastic scrap has yet to reach status as a true commodity, primarily because of very low profit margins and wide variations in product quality due to contaminants. Export markets for plastic scrap include large quantities of industrial scrap which are significantly more valuable than postconsumer materials. Nearly all postconsumer scrap exports are classified in export declarations as "Ethylene" or "Other" categories. Estimates of how much exported plastic scrap is postconsumer range widely (from 30 to 70 percent) but most sources do agree the amount has been increasing over time. While costs for overseas shipping can more than double the cost of plastic scrap, this material is attractive to foreign processors and manufacturers who generally have lower processing costs but much higher virgin resin costs than their American counterparts.

In 1994, approximately 42 percent of U.S. scrap plastic exports were shipped from California port districts with a total value of $61 million. Hong Kong has consistently been the dominant market for California's scrap plastic exports, accounting for nearly 75 percent of the market in 1994.

Other markets include Taiwan, China, and the Philippines. Much of Hong Kong exports are destined for use in small plastic products (e.g., toys) or for re-export to China. A rapidly developing market in Indonesia was halted in late 1993 when government officials banned several types of waste and scrap imports due to concerns about the potentially hazardous nature of the materials.

Table of Exports of Plastic Scrap from California Port Districts
(thousands of tons)

Aluminum Scrap

California exports of aluminum scrap have been characterized by wide swings in demand since 1989. Japan has been the principal market for both aluminum used beverage cans (UBC) and other aluminum scrap, although this market dipped dramatically during the early 1990s, due in part to the Japanese recession and the availability of less expensive scrap supplies from Russia.

Table of Exports of Aluminum Scrap from California Port Districts
(million of kilograms)

Glass Scrap

California exports of glass scrap and cullet are minimal, with Mexico and Japan being primary markets. In general, the weight of glass and its low value increases transportation costs beyond a reasonable return for most export markets. Even rail or truck transport to the nearby Mexican market becomes extremely costly when the Mexican value-added tax of 10 to 15 percent is applied to scrap glass shipments.

Used Textiles

The United States accounts for 45 percent of the world's used clothing exports. In 1994, approximately 37 percent of U.S. worn clothing exports were shipped from California port districts with a total value of $84 million. Mexico accounted for nearly half of this market, with other important markets including Japan, Pakistan, India, and Chile. Most used clothing is sent abroad in 100 pound bales for reuse as clothing in developing countries. The international trade in second-hand clothing is a thriving one. Although U.S. exports of used textiles have been growing since 1990, California exports have been relatively stable since 1992, averaging 65-70 thousand tons annually. Since 1989, the average value of a metric ton of exported used clothing has ranged around $1,000 per ton, making it one of the more valuable postconsumer materials.

III.  Primary Issues Relating to Exports of Secondary Materials

As stated earlier, California's export market for secondary materials involves complex interactions between domestic and foreign economic conditions and processing infrastructures. Below are summaries of the primary issues impacting export markets for secondary materials.

Relative Value of Resources

Many foreign markets can process secondary materials more cheaply than U.S. markets due to lower labor and other operating costs. However, lower processing costs are often counteracted by the cost of overseas shipping. The most important force driving the value of many secondary materials in foreign markets is their importance as primary sources of feedstocks for industrial operations. Many foreign countries have insufficient natural resources or industrial infrastructure to produce enough virgin feedstocks (e.g., wood pulp, plastic resin, aluminum) to meet domestic demand. Many foreign countries must import secondary materials to meet their domestic demand, while most U.S. industries only use secondary materials as cost-saving substitutes for virgin materials. Additionally, many Pacific Rim countries manufacture products from secondary materials for which quality standards are not as strict as those established by U.S. manufacturers.

Market Volatility

The volatility of overseas secondary materials markets is based on a number of factors, most of which are beyond the control of government or private enterprise, and difficult to predict with any certainty. The extremes of surges in demand and prices can often mean enormous profits or bankruptcy, so both foreign and domestic buyers on the West Coast tend to avoid long term commitments. This creates difficulties for sellers seeking stable demand for their materials, especially collectors of postconsumer materials that cannot afford to ship their materials to distant domestic markets. Some analysts have suggested the periodic cycles of intense demand from export markets have tended to discourage development of West Coast facilities.

Transportation

Availability of shipping containers can have a pronounced impact on markets. The U.S. recession in the early 1990s created less demand for Pacific Rim imports, which meant fewer containers available for exports back to Pacific Rim countries. In recent years, a general increase in European demand for Asian products has put more pressure on cargo container availability at West Coast ports. Some analysts predict that as NAFTA is implemented, rail and truck transport to Mexico will become easier and less costly, possibly providing better export opportunities for secondary materials generated or passing through California.

Hazardous Waste

In recent years, concerns about hazardous waste exports from developed to developing countries has resulted in a number of international agreements and treaties limiting or banning exports of certain types of hazardous wastes. The broad terms and vague definitions used in these agreements have created uncertainty about whether some types of recyclable wastes may be defined as hazardous. In particular, scrap metals and some plastic scrap exports are facing intense scrutiny from foreign buyers who must ensure that scrap materials are not considered hazardous waste by government customs inspectors. Of particular concern is scrap such as mixed plastic bottles that may contain hazardous liquid residues.

Complexity of Export Marketing

Marketing any product to foreign markets requires an extensive and ongoing knowledge of the product, the country, and many other factors. In California, most secondary material collectors must rely to some extent on export markets, and use brokers, export management companies, or other expert intermediaries to facilitate export sales. Domestic manufacturers of products incorporating postconsumer materials also face the need to understand the complexities of foreign markets, but often are young companies without the resources to study markets or hire export intermediaries. Most of these manufacturers typically concentrate exclusively less complex domestic markets.

IV.  Strategies Relating to Exports of Secondary Materials

As stated at the beginning of this report, exports will continue to play an important role in providing markets for secondary materials recovered in California. Periods of low demand and low prices created by exports markets contribute to undermining the interest of postconsumer material collectors and processors to establish or expand operations in California. The Board should continue to aggressively attract and expand local markets for these materials. Additionally, the Board should pursue the following actions to assist collectors, processors, and manufacturers in better understanding, using, and responding to export markets.

Promote the Recyclables Exchange

The Board should advise local governments, generators, and processors of the availability and capabilities of the recently initiated Chicago Board of Trade (CBOT) Recyclables Exchange. This computerized bulletin board system posts nationwide listings from buyers and sellers of recyclable materials, providing ready access to the markets for secondary materials such as waste paper and plastic scrap. West Coast markets have yet to make significant use of this system, which would assist them in tracking domestic (and potentially foreign) prices and participants in secondary materials markets. The success of this systems is dependent upon significant participation by market participants. The Board should aggressively promote use of this system to make market information readily available. As the market information becomes more widely available, CBOT will probably develop a futures market for various secondary materials, which would tend to create more stable markets over time. Actions the Board should take include:

• Subscribe to the exchange to support the system and access detailed information about individual trades.
• Encourage active traders to join and use the exchange by providing funding for RMDZ Administrators, municipal recycling coordinators, and other generators to cover the $1,000 annual subscription fee.
• Conduct or actively assist CBOT in conducting additional workshops for California local governments and other interested parties.
• Prepare and publish articles, advertisements, and other printed materials about CBOT.

Assist Recycled-Content Product Manufacturers

Many recycled-content product manufacturers are fairly young companies that may not have had the time or resources to explore potential export markets. The Board should work closely with and/or enter into an Interagency Agreement with the Trade and Commerce Agency to provide detailed export marketing assistance and counseling to recycled-content product manufacturers.

Promote Export Opportunities

The Board has limited ability to significantly affect export markets. However, working in cooperation with federal, state trade and commerce agencies together with Cal/EPA, the Board can help promote exports-especially to the fiber-short Pacific Rim nations. The Board should consider opportunities to expand export markets in cooperation with the other government agencies, especially for paper, plastics, and metals.

V.  Summary

Exports offer valuable market opportunities for California-collected materials and products made from them. These markets, though, are heavily influenced by decisions and forces outside of the State or businesses to accurately predict or control. The opportunities should not be ignored, but rather should be understood and targeted as Californians continue their efforts to reach 50 percent divrtsion by 2000.

Three strategies are suggested for Board consideration to expand export markets, especially for collected paper and plastics and products made from them:

• Promote the Chicago Board of Trade (CBOT) Recyclables Exchange.
• Assist recycled-content product manufacturers with export markets development.
• Promote export opportunities.

1996 Market Development Plan

Last updated: November 01, 2007