Hoggard reports exclusively on the huge impact for the global packaging industry of China's new innocuous sounding Method for Administration on Recycling Packaging Materials.When the Chinese government summoned heads of all the major FMCGs to a meeting in Beijing to discuss plans for a new Package Recycling Law in the last week of November 2007 it was a complete surprise, particularly since the invitation was accompanied by a fully fledged draft copy of the new legislation. While encouragingly headed “for comment” the last line ominously read: “effective from…” and its impact on the entire packaging supply chain could be huge.
The first thing that strikes me about this 'surprise package' from Beijing is that it is no surprise. China has decided to introduce some of the most stringent environmental regulations in the world. That it needed to do it, is no surprise. That it did it with such a clarity of vision might have taken some by surprise but it shouldn't have, had they been keeping their eye on the ball, and know which way the wind blows.
It didn't take an Olympic Committee statement about air pollution in Beijing to tell the government that something had to be done - they knew that already. In Beijing, Shanghai, Guangzhou, Shenzen and a host of other cities down the eastern seaboard you can actually see the air, while the western desert has been creeping towards Beijing for years, and a blue-green algae infestation of Lake Tai in Jiangsu has forced the City of Wuxi to suspend water supplies. China has been taking piecemeal steps to regulate packaging and packaging waste since 1998 when central government ordered the closure of more than 8,000 village-level paper mills polluting waterways with discharge.
Since 2002, there has been a total ban on the use of PS in food packaging, impacting mainly on fast food outlets, which has driven the fast food sector away from EPS containers towards folding carton. There is no market in China for EPS food container production, while PS is permitted as cushioning in export oriented transport containers, mainly for electronic goods products - but not for long.
In 2005, China took a lead in banning PVC wraps containing the oxygen scavenging plasticiser, DEHA, following concerns over carcinogenic properties.
A 2006 survey showed that, on average, each of China's 75,000 supermarket outlets spends more than US$50,000 on packing materials each year, representing between 0.5 per cent and 8 per cent of average outlet sales.
In early 2007, Beijing began to encourage citizens to reuse durable paper bags and distributed 15 million cloth bags to supermarkets, while in Liaoning province, the city of Jinzhou distributed 20,000 free bamboo baskets to customers as an alternative to plastics bags.
However piecemeal the approach in the past, in October 2006, the 11th Five Year Plan was published. At the core, along with the commitment to building 1.7 million kilometres of new highways, and to move more than 40 million people from the countryside to cities and “follow the principles of market orientation, industrialisation and socialisation”, was a directive on environmental protection which gave the new legislation wings. As the Chinese system is structured, once the upper echelons of government enshrine a policy in the 'Plan' it is handed back to the various ministries and departments to come up with guidelines and legislation for implementation.
This is the 'Method for Administration on Recycling Packaging Materials' (aka China's new Packaging Law).
Just in case anyone at the November meeting was in any doubt that China was serious about the issues, less than six weeks later the State Council issued the “Notice on the Restriction of the Production, Sale & Usage of Plastic Shopping Bags” which imposes a nationwide ban on the manufacture and distribution of 'super thin plastic bage'(which fall below 0.025mm gauge), requires that the public be charged for all other grades of plastic shopping bags, instructs retailers to charge seperately for them, draws up a tax, and (in a stroke of genius) specifically forbids shopping bags being offered as promotions or gifts to get around the tax.
It also requires the price to be printed on the bag, and if you ignore the rules, or don't have the price printed on the damn bag, it empowers the local Commerce Department inspectors to shut your business and confiscate your profits!
And that's just for starters, the main course is quite heavy going, but the desert platter could be well worth the effort.
The China Syndrome - a packaging meltdown
The new legislation is essentially a packaging waste law, drawing more on the Japanese system than on the European model.
In the next five years China is going to require light-weighting of packaging, will ban packaging which is neither recyclable nor biodegradable, introduce post-consumer waste household sorting, set up waste collection systems, build recycling and reprocessing plants nationwide, and monitor and control recycled material quality.
If that's not enough of an ambitious plan, the legislation also calls for the establishment of a 'market economy' system for trading in recycled materials, a recycled commodity exchange, perhaps the first in the world which, given the volumes of recycled materials shipped to China already, and could mean a global trading floor.
It also calls for PVC to be banned, PS to be further restricted, glass to be replaced by PET, clear PET to be used in bottles and masterbatches (like the Japanese system), a ban on thermoset plastic and foam cushioning, the replacement of standard plastic transport barrels with metal, the drastic reduction of the use of dye and ink, a ban on the use of heavy metals in inks (zinc and chrome in particular) and a ban on the specific use of toluene and benzene as solvents for rotogravure inks.
Incentives in the form of tax relief, investment in new technologies and grant-aid or subsidies are to be given, although as with most of China today the profit motive is considered the greatest driver.
The document also includes an appendix; a 'catalogue of packaging materials that can be recycled, reused and managed', effectively classifying all major packaging materials into those which are 'encouraged', 'restricted' or 'banned'. Clearly, at this stage it is not a totally comprehensive list, but as an appendix it can be expanded without too much fuss.
It is backed up by a range of penalties ranging from a RMB1 million (US$135,000) fine for a minor breach, the threat of business closure and/or criminal prosecution of both company and individual directors.
A specific clean-up provision is added: “the entity that pollutes shall control the pollution” - is a very important position to take in a country where previously a fine might have been imposed on the unlucky not very well-connected manufacturer, no responsibility for clean-up had been apportioned, the assumption being that it was the state's job. Under the new law; the polluting entity, has to pay the cost of clean-up - times a factor of five times!
Brand Owner Pays
The other crucial position statement is the only clause which appears open to interpretation: “the entity packaging the products shall be responsible for disposal of abandoned packaging materials”.
How practical is it for Coke to scour the streets of China looking for Coke cans? However, as a measure of just how serious the Chinese are, I understand there were dark hints on the sidelines of the November meeting that, unless the FMCGs sign up to the legislation, their participation in next year's Beijing Olympics will be 'reviewed'.
The reality here is that an intermediate 'association' will probably establish a fund which, like Japan, will collect fees based on ex-factory container shipment weights which will then be channelled into waste collection and recycling.
The scope of the legislation covers the entire packaging supply chain quite specifically mentioning designers, manufacturers, brand owners, printers, converters, suppliers of equipment and consumables, materials manufacturers, waste collection, recycling and reprocessing.
Recycling collection systems are to be set up, R&D into current technology is to take place, public campaigns will be launched, and collaboration with foreign researchers and the development and use of new recycling technologies will be encouraged.
Provincial and municipal authorities have already been instructed to allocate and re-zone land for the construction of 'large scale' Special Recycling Economic Zones where the business of classifying, sorting, trading recovering and reprocessing is to take place - The Method even goes as far as detailing the pre-qualification conditions for recycling businesses (five years experience, paid up capital of more than US$650,0000, processing capacity in excess of 20 tons per day, tertiary qualifications in engineering, environmental studies etc).
When China uses terms like 'large scale zones' it actually means mega zones - across the river from Shanghai sits Pudong, with 1.4 million inhabitants, it is not a city, but a Special Economic Zone.
An interesting indication of the realities of modern China is the inclusion of a whistleblower clause. Obviously for any recycling legislation to be effective, the public must be convinced it will work. Educating them that sorting and disposing of their garbage has value is a good step, but convincing them that their household contribution is part of the wider scheme of things is different.
There's no point in asking the Chinese public to selectively dispose of waste when a factory nearby is dumping garbage in the dead of night. China's method of dealing with public complaints in the past has been less than transparent; the goose farmer, Quao Songju was jailed for reporting Avian Flu outbreak, as was Dr Jaing Yanyong who exposed the extent of the SARS epidemic - a case of 'shoot the messenger'.
This legislation contains an astonishing whistleblower provision which gives the public the right to report actions of wasting resources, damaging environment and excessive packing.
Whistleblowers are to be given protection and rewarded by local authorities. A small, but important human rights clause tucked away in packaging legislation.
A bold move
On further reading of the legislation the methodology begins to emerge. Rather than dumping everything onto one government department to administer, no less than five national government agencies will be involved in managing the legislation.
National Development & Reform Commission is the top level management, responsible for co-ordinating all the agencies. It will issue the 'Catalogue of Encouraged, Restricted and Banned materials/processes'. It produced the Five Year Plan and gave the legislation wings in the first place.
Ministry of Commerce will set up a market-driven collection and supply chain for recovery and recycling. Market-driven, means significant opportunities for companies specialising in waste recovery and recycling.
General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) is to provide technical expertise, establish standards and supervise quality of recycled materials and processes. It will have some policing and enforcement powers. AQSIQ is basically the border quarantine inspectors which, in July this year, refused entry to a consignment of Evian for having more microbes than permitted in China.
State Environmental Protection Administration acts as the main policing authority.
China Packaging Federation is responsible for the overall management of the new packaging materials recycling industry. This is the agency which will have the most direct contact with the packaging industry. From 1998-2001 it administered China's $20 billion packaging upgrading programme.
Behind these government departments, with no apparent direct involvement, other than the fact that everyone reports to it in the normal course of government, sits the state-owned Assets Supervision and Administration Commission of the State Council (SASAC). The chairman of the SASAC is Li Rongrong, party secretary of Central Communist Party of China, an indication that this is a very serious enterprise indeed, coming from the highest level.
Who is going to pay for it?
To begin with China is eying the savings in forign currency it will make by not importing other country's scrap: In 2005 China imported rather a lot of packaging waste: 8.11 billion tones of it to be precise: 6.18 billion in waste paper, and 1.92 billion in recovered plastic - and yes, PE accounted for 30 percent of that!
Then there are the taxes for selling packaging (like the store-tax on plastic bags), collection and transport fees.
Then there will be the profit tax on the sale of reprocessed packaging as it moves through the Special Recycling Zones from one manufacturer to another - though there will be a whole raft of subsidies, tax-breaks and other incentives for companies setting up in these Zones and using recycled packaging material - this doesn't just mean corrugaters or bottle blowers using recycled materials, but could include textile factories (more than 65 per cent of Japan's recovered PET returns to the system as textiles!) expanding on the concept somewhat, it could include China's massive auto industry (using recovered aluminium cans).
I think they just might have something there - let's not forget that China's richest woman, Zhang Yin, of Nine Dragons Paper made about US$3.4bn by recycling scrap paper imported from the United States.
What are the implications?
Clearly this legislation, when passed into law, will change everything. To begin with, what we will see will be China ramping-up by issuing a series of State and Municipal Council Notices, such as the Plastic Bag Ban, covering bottles, bags, sewage department collection, home-sorting etc each covering some aspect of packaging. Opportunities exist for equipment manufacturers as firms re-tool to exclude PVC and PS from their production process.
• On the print side: China has more than 82,000 printing companies, of which 20,509 are specialist package printers. Of these, about 8,000 run gravure lines and most have more than one line. All of these use solvent-based inks, mostly toluene - because it is an easy way of laying colour down onto a substrate. With a few exceptions these machines are Taiwanese and not particularly tolerant of being reconfigured to run aqueous inks. So, at a rough guess there will be a demand for probably between 14,000-20,000 replacement gravure machines during the next five years.
• At the recovery end: All forms of plastic and paper reprocessing and recycling equipment will be in hot demand as every city in the country rolls out Recycling Industrial Zones specifically constructed for the purpose. - as will companies and individuals with more than five years experience in the field.
• For the drinking classes: The Chinese drink their way through US$8bn of beer annually, more than any other country in the world. One brewery, Lanzhou, does have beer in PET, but to convert the entire country's capacity from glass to PET will not only involve massive investment but will also place a strain on the global PET market.
• For the gambling classes: Once the Recycling Industrial Zones are up and running, we have to contemplate the prospect of a recycled commodity market, where anyone in the world will be able to take a punt on commodity contracts on any kind of recovered materials, sell it long or short and gamble your wife's savings.
The Author: Stuart Hoggard