Out-of-pocket costs associated with China’s new stricter pre-shipment inspections could add hundreds of dollars to the process and become a logistical nightmare for recyclers in the United States.
The Chinese government outlined new rules for pre-shipment inspection procedures - detailed in Notice No 48 of 2018 by China’s General Administration of Customs - that became effective on Friday June 1.
Under the new protocols an inspector from a licensed pre-shipping inspection agency must now be present to supervise the loading of every China-bound container and stamp it with the proper sealing marks.
“Now you have to schedule the inspector to be there present at the loading of the container five days ahead. Scheduling this is going to be [a] logistical nightmare and [the Chinese Certification and Inspection Group, or CCIC] will charge you for everything,” one exporter said.
At the moment, the CCIC North America inspection division - which will resume operations on June 8 after being suspended by the government in in early May - is the only agency able to do inspections in the US, market sources told American Metal Market.
CCIC North America operates out of its headquarters in Rancho Cucamonga, California, and has offices in Flushing, New York; Naperville, Illinois; and Benito Juarez, Mexico. Each office is responsible for certain territories in their respective regions.
Aside from creating logistical challenges, market participants said the biggest hurdle will be the potentially steep costs associated with having an inspector physically come to the yard.
Sources familiar with the new protocols told American Metal Market that the cost for pre-shipment inspection will include a $152 inspection fee, a rate of $60 per hour for the inspector’s time during the visit, a 54-cent-per-mile charge for travel costs if the inspector drives to the yard, and in certain cases - if deemed necessary - airline travel, rental car and hotel costs.
“The new CCIC standard will shift from being a photo inspection to a live inspection, and this will increase the cost. The inspectors will travel by car or plane to the yard, and this can add hundreds of dollars per container,” a second exporter said.
With recyclers and brokers working on a small per-container profit margin, giving up hundreds of dollars for a pre-shipment inspection could shift exports from China to other outlets in overseas markets or into the domestic market.
“From a brokers’ perspective, a penny to a penny and a half per lb equates to $400-600 dollars gross margin per container. This can break us. Depending on where the shipment is coming from, this could add $500-1,000. The only grades this will make sense on are the higher-grade furnace-ready material. Low-value items will be tough to ship when you factor in these costs. We just won’t be able to do it on certain items in certain regions,” the first exporter said.
The costs of this process will vary dramatically depending on the recyclers’ proximity to CCIC offices, so until more pre-shipment inspection agencies come online recyclers in rural regions of the US will have a severe disadvantage, market participants said.
The requirements open the door for new third-party inspection agencies to become licensed to conduct pre-shipment inspections, although sources said it will take some time for new agencies to get established.
“This is total disaster for recyclers in rural areas. Our broker told us that they are taking 2 cents per lb off their quotes because of the new CCIC costs. Until there are more inspectors, what are we supposed to do? This just creates one more bottleneck in the market,” a scrap supplier said.
In fact, the disparity in costs could create a rift through the industry, depending on the recycler’s volumes and proximity to a CCIC inspector, until third-party pre-shipment inspection agencies are created.
“I think the West and East Coast will be more competitive for material and yards in inland America may have to turn to the domestic market. It all depends on the distance from CCIC offices and the number of containers. The more containers, the lower the fees, but the biggest factor affecting the inspection is the flight [cost, if required],” the first exporter said.
“It’s a whole new ball game. The closer you are to the office the better the price you’ll get because you’ll have cheaper inspection fees. Most people don’t have a lot of loads on hand to tap into economies of scale,” a third exporter said.
Some exporters said they are already starting to quantify the cost for every yard they trade with to calculate the expected profitability from each site.
Meanwhile, market participants debated who will ultimately bear the cost but unanimously agreed that prices will be more susceptible to the down side.
About “99% of the time this is going to be a cost that brokers bear but in the long run it’s going to get passed through to the shipper and the all the way down to the consumers in China,” the first exporter said.
“It will increase the fees but Chinese consumers still need material, so I think they will bear the cost. But they will lower their quotations to the yard to offset the cost increase,” the second exporter said.
“The spread differentials in the market will accommodate these costs. Exporters will have to pay more and they will still have to get through the quality hurdle. Overall, this puts more support on pushing prices lower,” a fourth exporter said.
“If the brokers don’t eat the cost, they’re going to get hit by a drop in volumes,” the scrap supplier said.