Metal Movers: EU scrap restrictions – The deep dive

Author Argus

This episode focuses on the implications of the new European Union waste ship regulations (WSR).

Learn about the short and long-term impact of the new proposal with Ronan Murphy, European Editor and Chi Hin Ling, Deputy Editor of Argus Metal Prices.

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Transcript

Ronan: Hello, and welcome to this podcast brought to you by Argus Media, a leading independent provider of energy and commodity price and information. In this episode of Metal Movers, we will outline and discuss the implications of new European policy on scrap metal exports that has potentially significant implications for all seaborne trade. My name is Ronan Murphy, European editor of Argus Metal Prices. And I'm joined by Chi Hing Ling, deputy editor of Argus Metal Prices and our primary reporter covering the European scrap industry.

On the 17th of November last year, the European Commission published its long-awaited proposal for the final adoption of new European Union Weight Shipment Regulations, or WSR. The European recycling industry knew for some time that this proposal would contain some measures that would restrict scrap metal exports, but the extent of the restrictions was unclear. In the month leading up to the announcement, concerned European Commission would propose a complete ban of all scrap metal exports from Europe, which would, of course, have seismic ramifications for scrap metal importers across the world.

The eventual release of the WSR proposal did not include any blanket ban and outlined restrictions that are far less dramatic, and which on first glance appear to be of limited nature and which are certainly not an immediate concern. But further investigation with the proposal does indicate that the new regulation will impact EU scrap exports in the long term and shows that there is a lot of work that the recycling industry in Europe and the importing countries must do to get the most favorable outcomes for future trade. The key headline of the Commission's proposal is that the European Union should restrict export of all waste to non-OECD countries that fail to adhere to EU environmental standards. Despite the recycling industry's best efforts, the EU, like many other global governments, still classifies virtually all scrap metal as waste rather than the industrial raw material that it represents for so many industries.

This measure will affect some of the largest consumers of EU scrap, most notably India and China, but also Pakistan, Bangladesh, Egypt, and most of Southeast Asia. The Commission proposes to draw up a list of authorized non-OECD countries that are eligible to import waste products that require approval, which, again, covers pretty much all commercially traded scrap metal. Countries will have to apply to the EU to be placed on this list and specify the scrap metal products they wish to import. Additionally, EU exporters will have to conduct independent audits of facilities to which they ship waste in order to ensure that these facilities can demonstrate the managed waste in an environmentally sound manner.

The good news for EU recyclers and their customers is that implementation of these policies is going to be a slow process. The proposal is now under review by the European Parliament which means there is still a possibility for the recycling industry to appeal for the export restriction to be removed or watered down.

Although my own personal opinion is that this is unlikely as the restrictions are already a lot less far-reaching than what I know EU scrap consumers were seeking. The review process typically takes a year, although it could be fast-tracked. Even once the rules are adopted, they will only be applied after three years. So, in real terms, the earliest that any restrictions will kick in is 2025.

So, what trade flows will these restrictions primarily impact? Export data shows that non-OECD countries are absolutely critical export markets for all of the major EU scrap flows. Around 23% of aluminum scrap generated in the EU is exported each year based on the average volumes of 2018 to 2020. Exports increased to around 950,000 tonnes in 2020 of which almost two-thirds was dispatched to non-OECD countries. Copper scrap supply is around 2.6 million tonnes per year in the EU. Exports on non-EU countries totaled 608,000 tonnes in 2020 of which around 85% was to non-OECD countries. Almost 1.1 million tonnes of stainless steel scrap was exported from the EU in 2020 of which just under half, or 420,000 tonnes, was to non-OECD countries.

And ferrous scrap represents the largest volume of scrap metal exports from the EU, but exports to non-OECD countries relative to total exports are much lower compared to other metals ... the bulk of EU ferrous scrap is consumed by Turkey, which is an OECD member. The EU exported 16.4 million tonnes of ferrous scrap in 2020 of which 3.4 million tonnes, or just over 20%, was exported to non-OECD buyers. Almost all of the non-OECD recipients of EU scrap metal exports are in Asia, with India the most consistent buyer, falling in the top three non-OECD importers for each type of major scrap. It's the largest export destination for EU aluminum scrap with its strong appetite for mixed grades ... driving imports even higher last year to around half of the overall non-OECD total purchases.

Aluminum max scrap exports to China have fallen back between in the last three years with the introduction of stringent new quality parameters on the Chinese side that are only largely important with extremely high purity metal. But despite this, China remains the second-largest non-OECD importer of aluminum scrap and the fall in exports of these materials in China have been accompanied by a rise in EU exports to nearby countries like Indonesia, Vietnam, Malaysia, and Taiwan, where scrap that falls below Chinese's quality requirements is now being shipped for processing and on the ... to China. China also remains the largest importer of EU copper scrap despite exports to the country dropping by more than half since 2018 with the advent of quality restrictions.

Looking towards steel scrap, India is the critical market for EU's stainless scrap exports to non-OECD countries and typically receives around 25% of all EU's stainless scrap exports outside the trading bloc. Ferrous scrap shipments to non-OECD countries are more diverse relative to other types of scrap, but the two main regions to which materials are applied are North Africa and South Asia.

So, looking at potential consequences of these limitations, even if most existing non-OECD importers are approved to receive EU's scraps under the new legislation, European exporters will now face increased cost to export to these countries, primarily through the requirement for independent audits but also through greater complexity of paperwork. The European Commission outright stated in the WSR proposal that these new restrictions will potentially lead to 2.4 to 6 million tonnes of waste staying in the EU each year. It expects exporters' costs to rise as a result of the independent audits required. And it said that users of waste in the EU may be able to use more waste as feedstock, which they should be able to purchase at a lower price compared with the baseline. Essentially, by making scrap more expensive and challenging to export to key markets, the Commission hopes that this regulation will make more scrap available to European metals producers at cheaper prices.

So, what is driving these EU restrictions? While there's no doubt a legitimate concern among European legislators that European waste not simply be dumped overseas to countries where it could potentially threaten the environment and human health, there is also a strong push from European industry to halt the flow of valuable raw material out of the trading bloc. On a very basic level, European scrap consumers already want lower prices right now. But what will increasingly shift to need over the next decade as European metal producers transition to a sustainable, low-emissions future in order to meet EU climate goals. A massive increase in consumption of recycled metal is essential to achieve this. European steelmakers have committed on-mastership from blast furnace to electric arc furnace production as industry seeks to cut CO2 emissions by 80% to 95% from 1990 levels by 2050.

Leading steel makers including Tata Europe, ArcelorMittal, Voestalpine, and SSAB have all committed to build new EAFs in the next decade and phase out their VOFs. Almost all of them have stated that they plan to use the EAFs in conjunction with direct reduced iron plants so that they can carry on utilizing iron ore. But we estimate that these EAFs will also use large volumes of ferrous scrap and that a major increase in European scrap demand is inevitable. Europe's largest stainless steel producers have already produced their steel using more than 80% recycled material. German stainless steel producer, Aperam, last year purchased ELG, one of the world's largest stainless steel scrap suppliers, and stated that the acquisition was intended to increase its presence in Europe's circular economy. This kind of vertical integration already exists in the European copper market with Germany's Aurubis, which is simultaneously one of the largest copper producers and recyclers in Europe. And it is highly possible that metals producers across the continent may seek to duplicate this model in order to secure the scrap flows they need over the coming years. So, I'd like to turn over to my colleague, Chi, now to ask a few questions on the impact of both short-term and long-term of these restrictions and what it means for the scrap metal market. So, hello, Chi.

Chi: Hello, Ronan.

Ronan: So, first question is, really, how significant will these restrictions be once they're introduced? What exporters from Europe will be most affected and which import markets could be most disrupted?

Chi: It's not going to be as tight as some recyclers have feared. We will have to wait until the Commission to drop the list of authorized non-OECD countries to fully understand the impact, but I believe that it will have a great impact for many recyclers regardless of which country is banned and which country is allowed to receive EU scrap, mostly because after increasing the costs for exporters. Under the proposal, the scrap exporting companies are responsible to demonstrate that their exports are sustainable and they will have to conduct independent audits for the facilities that received their waste to ensure that the facilities are operating in an environmentally sound manner. I can see that this increase in cost will particularly hurt the small and medium-sized recyclers the most. In terms of the imports' markets, the largest non-OECD buyers of European ferrous and non-ferrous scrap are China, India, Pakistan, Egypt. As Ronan said earlier, many of them are in Asia.

Based on another Commission's updates to the regulation in November, most of these countries are very much well prepared and have submitted the relevant required documents to the commission, but China did not. And China was eventually removed from the annex, meaning that any shipments to China now require prior consent. This may, again, become the problem going forward when the commission is drawing up a list of non-OECD countries that are allowed to receive EU scrap because of the difference in how China and EU classify scrap. What the EU call metal waste in China is called recycling raw materials. And China is almost certainly not willing to officially say that they want to import any kind of waste after spending a lot of energy and time to set up their input regulations.

Ronan: I mean, is it expected that the EU will engage closely enough with China to ensure that this kind of lack of communication is improved and that it won't be an issue going forward once the restrictions are brought in?

Chi: Yes. I think the EU will have to engage with China. But we all know that all these engagements of which they're gonna go for in Brussels, and that means that it's a long way away from China. And I am not 100% sure how the officials in Brussels fully understand what each country needs in terms of metal scrap. So, I expect that the EU and China and many other countries will continue their conversations, but it could be very difficult.

Ronan: And you mentioned the kind of increased costs on the export side, in particular with the audit. Do you think there's a particular concern for smaller merchants and traders who perhaps don't have the scale of the larger recycling firms? What kind of impact could there be on these traders' margins? And what kind of implications does that have for the European scrap industry?

Chi: That's correct. I've spoken with several recyclers and traders in Europe. Many of them said that at the moment looking at the proposal, they probably will need an extra person just to handle all the paperwork. And of course, they then also have to pay an audit fee to an independent firm to audit the facilities, which means that it's going to be a huge increase in costs because many of these smaller recyclers are more small traders, exporters. They typically don't have a large workforce at all. For example, you're able to set up a trading firm just having one or two people and an additional person will ... that is 25% or 33% increasing in terms of personnel.

Ronan: Yeah, absolutely. And I think we're seeing already in... We're certainly already seeing in the U.S. in the last year large-scale consolidation across the recycling industry. We're seeing it here in Europe as well with the recent ... deal. And it does seem that restrictions like this just go further towards making it a little bit more of a difficult place for smaller operators in an environment that has increasingly been dominated by giants. One thing I wanted to ask was really whether you think these restrictions will satisfy what European industry wants in terms of preserving access to raw material or is this just the beginning? Do you foresee further EU scrap export restrictions in the longer term?

Chi: Yes. I think at least at the early stage of the implementation that there will be more scrap available to the domestic market. It is natural to expect that European recyclers will sell more in domestic market once the cost of exports increase, leading to a higher supply and lower prices in domestic market. But then collection rates of scrap may fall at a later stage as we have seen in Russia and Ukraine because recyclers' margins start decreasing. In the longer term, I can see that the EU may adjust the policy and set even straight to senders, both to the buying countries and the qualities of scrap it is exporting. I don't think that the EU will have any issue exporting higher grade scrap in the long run such as TNS and shred, but I am very much skeptical on when it comes to the classic, traditional HMS one and two material, which may be another problem if the EU in the future restricts HMS exports because HMS is certainly not the most want to scrap grade by many European mills.

Ronan: Well, I think that certainly there is... That may indeed be why we're starting to see in the market, we're starting to see large recyclers exploring ways to develop extremely highly processed products that can be where you can essentially kind of uplift, obviously, grade scrap to a higher quality product that really is required for both, as you say, a more stringent export market, but is also what domestic consumers will require.

Chi: Yes, that's right. We're seeing some of the recyclers are citing research. But my question is always this, you know, we can see this new export ban coming into effect in 2024, 2025 or so. We know that research is not gonna be done in a couple of years and may take longer. If there's a gap then where are these HMS going to go?

Ronan: Absolutely. And that's kind of a question that was posed to me when I was discussing this topic in a presentation to an Asian Recycling Association. But there's a query as to whether the EU may have watered down kind of the scope of these trade restrictions over concern of punitive trade countermeasures from major scrap importers like India or China. Do you think this is likely at all or, if not, why do you think the measures that were eventually introduced were not as stringent as the total ban that was feared?

Chi: Well, there's always that possibility, isn't it? But I think even the EU is one of the largest scrap exporters in the world and many countries do heavily rely on imports from the EU. I think there may be just enough alternative supply from other suppliers. For example, the UK, the U.S. or Japan and Australia and Asia, although they may likely come at a higher price, but they are enough to fill the gap. I don't think any of the major scrap importers would want to take the risk of starting a trade war. I don't think any of the major scrap importers would want to take a risk of starting a trade war with the EU just because of a scrap ban from the EU even if it was a total ban of exports.

Ronan: Absolutely. Well, I'll just move to wrap up now, Chi. But I suppose the final question is just looking at the wider scenario of protectionism in general in the scrap market, you know. Did these restrictions imposed by the EU, as we've mentioned, are not in a bubble? We've seen similar... We've seen much more punitive restrictions and duties imposed by Russia and Ukraine in the past, in recent years that are still effective. We've seen movement from Malaysia. This is a recurring issue for the industry to face. I suppose the fundamental question is do you think this is going to continue to be an issue and going to be one that seaborne trade is going to continue to be disrupted by in the medium to longer-term?

Chi: Yes. I think at least we can expect from the more developed country like the EU, the U.S., they will continue to... I think they will all look to be more protective of their scrap material. I think that scrap material, because of the whole movement to carbon neutral and the green economy, I think scrap is becoming more valuable. And I think no doubt that all these developed countries are looking in the roots that how they're going to utilize more of their scrap and less of primary raw materials in steel making. So, yes, I do think that countries will take various measures. And we know that when it has come to measures like this, there's always a chance that they will disrupt the seaborne markets.

Ronan: Thanks so much. Thank you. Thank you very much, Chi. Much appreciate your time. And to any listeners, if you enjoyed this podcast, please tune into our other episodes to learn about the metals market. For more information about the European and global scrap markets, please visit argusmedia.com. Thank you very much.

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