Market trends

Chinese cartons


China, paying attention to the quality of its own products and the raw materials that it uses, has issued a recent regulation which makes the parameters for waste paper entering the country even more restrictive. A measure which is changing the structures of an entire sector worldwide.

2018 is a year of great changes and new challenges for the paper sector, in particular for companies which use or sell waste paper. The biggest changes are coming from China, whose market has grown so much in the last few years that, through its choices, it can redesign the business dynamics of all other countries, including Europe. The main reasons for the redefinition of the balances which we shall continue seeing in the next few months are two; the policies introduced in the country to protect its own businesses and the economic war with the United States.

Dan Zhang, assistant general manager of Cycle Link Europe, a company which is part of the multinational Cycle Link  speaking at the Miac Recycling conference organised in Lucca during the 2018 Miac edition, has analysed the aspects underlying the Chinese choices and outlined what is happening in the sector. 

Packaging in China

Over the last decade, the Chinese market has experienced constant economic growth. Between 2009 and 2017, explains Zhang, the demand for corrugated cardboard, driven by the country’s development, has continued to increase and, although the 2018 data shows a slowing down and a scenario characterised by a slight fall, the level remains substantially stable. Given this demand, the analysts had anticipated a growth in manufacturing capacity of 5.3 million tons of paper and cardboard. As of today, however, the actual figure is 2.7 million tons and it is concentrated predominantly in the large companies (Figure 1). A phenomenon which is partly due to the trade war with America, but especially to the lack of raw materials.

Paper production in China depends greatly on importing waste paper. Of the total quantity of about 63 million tons in 2017, 20 million – that is 32% – comes from importing. “The data for waste paper use throughout the world”, states the manager, «shows how, in 2017, China was the leading country for both using and importing of OCC (old corrugated containers)».

If in 2017 the People’s Republic of China (PRC) was declared the leading purchaser in the world of waste paper, the estimates for 2018 according to authorised quotas speak of a significant decrease and, at the same time, of a increase in imports by other Asiatic countries.

But which are the countries which sell OCC in Asia? The USA still remains in first place, followed by Europe and Japan. «In particular, according to RISI data, within Europe the largest exporter is the United Kingdom which, in 2016, was responsible for 60% of the total European exports, followed by France and Italy. In 2018 a significant drop in exports from Europe was noted, especially to non-EU countries, in particular, whilst European exports are increasing to other Asiatic countries and Turkey. There has been a reduction of 2.6 million tons of waste paper sent to China, compared with 2017» (Figure 2); even, according to data from Chinese customs, from January to July 2018 a total decrease of 50% in imports of OCC into China was recorded.

New limits and strict controls

The reasons for these changes are attributable to a series of regulations issued by the PRC authorities to protect their own market and the environment. In reality, the Chinese government has been initiating new policies and actions to this effect since 2013, with the Green fence policy, aimed at protecting the environment. These policies led, in February 2017, to the National Sword, an action to protect the national market. It is in this context that the new list of products which it is forbidden to import came into effect in December 2017. «Since the end of last year, therefore, unsorted waste paper can no longer be imported into China. This applied until March 2018, when new limits on the presence of polluting materials in imported waste paper were imposed: the new limit is 0.5%». This very strict threshold has changed the world balance in the buying and selling of waste paper.

To make the situation more complicated, in May new regulations were published regarding paper arriving from the United States. According to these regulations, imports from the USA must be subjected, by Chinese customs, to the so-called “open control”; in other words they must be fully inspected, whilst in August 2018 duty on paper imported from America was increased by 25%.

All this has literally messed up the market and in no time the effects made themselves felt not only in exporting countries, but also in China itself. «From a practical point of view, various aspects are emerging», states Zhang. «First of all the pre-shipment inspection, which is carried out by Ccic (China certification and inspection corporation), is undergoing some changes: self-inspection has been removed, now the inspection is carried out order by order, by opening every container, and monitoring during each loading is envisaged for sample checks to be carried out».

Once it reaches China, the checking of goods passes into the hands of the “Gacc” (General administration of customs of the People’s Republic of China) which now manages Ccic and Ciq (China inspection and quarantine). «The monitoring of these two authorities has become very much stricter. And whilst American waste paper is 100% submitted to open control operations, European paper follows different checks, depending on the home port; on average this type of check affects from 30 to 50% of goods. All port inspections are monitored in real time remotely by the Gacc authority and the trend», Zhang expects, «is that the checks will become even stricter».

Boomerang effect

The restrictive Chinese regulations have clearly had a great impact on the sector industry of the country, provoking three important phenomena: the drop in imports, the increase in prices of domestic paper and greater difficulty in obtaining authorisation of the import quota.

«In 2018, from January to July, each month showed a fall in imports of waste paper, averaging about 50%, which has revealed a gap between supply and demand, with a sharp increase in the prices of the Chinese OCC, equal to 60% more compared with the same period of the preceding year. At the same time in exporting countries the prices of paper fell sharply, particularly for that paper not complying in terms of quality to the limits laid down by the new Chinese regulations, creating considerable price differences between exports to China and those not to China».

On the other hand, with regard to the authorisation of import quotas needed by Chinese companies in order to be able to import waste paper, «in 2018 it is increasingly difficult to obtain this approval. According to data from the Ministry for the Environment, up until 06 September 2018 19 groups of import quotas in total were approved, making a total quantity of 14.6 million tons, in other words 48% less compared with the same period last year». Quotas concentrated in the hands of a few large businesses; in particular three companies obtained 60% of the total quotas: Nine Dragons Group (34%), Lee&Man Paper (14%), Shanying Group (12%). On the one hand this concentration, explains Zhang, helps the State from the point of view of monitoring; on the other hand, these businesses being of a certain size, their capacity for monitoring, collecting and managing of imported material is also greater.

Possible options

The choices made by China will also influence the future of the paper sector, starting with the China – United States trade war which «brings with it numerous factors of uncertainty, a significant fall in imports from the USA and a change in the dynamics of our sector, causing a reduction in demand for OCC».

Neither is anything known at the moment of how the policy regarding the sector will be structured, «currently in China a gap between supply and demand has occurred, and it is necessary to ask oneself how the problem can be resolved». Certainly the Chinese government is pushing for an improvement in waste sorting – which, moreover, already being at a high level, leaves little space for further improvement – «but the question is whether quantity and quality of the fibre can be suitable for internal paper manufacture and therefore whether Chinese paper can replace imported paper». Furthermore, whilst previously a large part of Chinese paper which left the country in the shape of packaging returned through the import of OCC, now this is not the case and therefore one wonders how to recover the lost quotas. There could be alternatives, concludes Zhang, «like wood pulp. However, there is a balance in the world between production and demand, and therefore this makes any significant increase in manufacturing capacity unlikely. Another solution for China could be the direct purchase of waste paper pulp, processed abroad».

One fact is certain, the outlook is developing and it just remains to adjust to the change, all the more so because a further effect produced by the imposition of stricter import limits on waste paper in China has also involved other states, «even other Asiatic countries are thinking of changing their own regulations with regard to the importing of waste paper, creating such measures so as to improve the quality of the paper».