Circular File: Diversion Dynasty

“The tail is wagging the dog.”

That is how a paper broker once described the influence of export markets on the value of recycled paper. He made that comment in 1995 and was referring specifically to the impact of Chinese mills.

At the time, his analysis was groundbreaking. Only 10 percent of the paper collected for recycling was exported and China was not the biggest market. Nonetheless his analysis was on target. In the mid-’90s, when Chinese mills needed more raw materials, they began paying more than American mills and other competitors. In response, those markets had to pay more, resulting in more revenue for collectors and processors, including many curbside programs. Of course, when the Chinese didn’t need extra supply, their prices went down. Other buyers breathed a sigh of relief and curbside programs dealt with the reality of lower revenues.

He also predicted that the tail would only become more powerful. Time has proven him right. We now export a bit more than 40 percent of the paper we collect for recycling. China is the biggest market. We also send a majority of PET bottles to China for recycling and large amounts of scrap metals. Only aluminum cans and glass bottles remain almost exclusively domestic recycling markets.

Some recycling advocates say this dependence on China is wrong and must stop immediately. After all, shouldn’t American manufacturers have first access to these raw materials? Perhaps, but whoever pays the highest price has an obvious advantage. In addition, with ultra modern mills, cheap labor and voracious demand for their products, Chinese mills could afford to be less demanding about the quality of paper bales they were buying. They could outcompete other buyers. Most recyclers would simply argue that their employees and customers – including curbside recycling programs – benefit from the best prices.

Most recyclers also know that recycling markets are not as strong as they used to be. We are in the midst of a yearlong decline in the value of recyclables. A typical ton of curbside recyclables has lost one third of its value in the last year. The September price data from the Official Board Markets shows a continuation of this trend with corrugated box, newspaper and mixed paper markets down substantially from a year ago.

Prices are down because Chinese mills are paying less. Built to supply boxes for products shipped from Chinese factories to both domestic and international consumers, they need fewer raw materials because demand for finished products is down. The European debt crisis, America’s stagnant economy and a Chinese economy that is probably even softer than official government data shows, have created a triple whammy of lessened demand. Recycling markets are not likely to improve for a while. Fortunately, this down cycle will not last forever. Sooner or later consumers will start consuming again and recycling markets will improve.

At last month’s Resource Recycling Conference, a speaker asked if China “owns” recycling. He answered his own question by saying “no, ” we live in a global economy. Countries depend more than ever on each other as sources of raw materials and finished products. However, as long as Chinese paper mills and other manufacturers are willing to pay more for raw materials than their competitors, they will continue to have a dominant market position in recycling markets.