Survey of Cargo Theft in China (2011-2013)

April 2015

I. INTRODUCTION AND EXECUTIVE SUMMARY “Our company has been shipping This Report summarizes the results of a survey of Institute of Scrap Recycling Industries, nonferrous metals globally for Inc. (“ISRI”) member data on suspected cargo theft from containers in transit or in decades. In recent customs at ports in China between 2011 and 2013 (the “Survey”). Venable LLP years, the cargo theft (“Venable”) was retained by ISRI to administer the Survey. All member submissions issues in southern are kept confidential. China have grown so severe that we are forced to limit According to the Survey results, scrap theft in China is a growing and industry-wide operations in this problem. region. We do not view this as a proper  Survey Participants reported losses of over $2 million from 548 incidents of solution. suspected cargo theft in China between 2011 and 2013, with almost one million

Limiting trade dollars of losses in 2013 alone. Extrapolated across the entire scrap industry, the because of criminal data suggests that cargo theft in China is a growing, multi-million dollar a year activity negatively problem. impacts both the  The Survey reported that suspected cargo theft in China has focused primarily on Chinese consumers copper and other nonferrous metal scrap. and their international suppliers.  The Survey suggest that most cargo thefts have involved shipments that were transshipped from ports in or around Hong Kong to inland ports within the Pearl We have long held a River Delta, Guangdong province. For 2013, roughly 60% of the total suspected belief that the theft issues are happening cargo theft incidents involved five ports within the Pearl River Delta: at transshipment Sihui/Mafang (131), Zhaoqing (35), Sanshui (17), Wuzhou (9), Nanhai (6). ports (Hong Kong, Chiwan) in south The remainder of this Report summarizes the Survey methodology (Part II), highlights China and the key findings (Part III), and analyzes the issue of scrap cargo theft in Ching and provides secondary ports along the Pearl River recommendations for what appears to have become an industry-wide problem. In Delta. particular, ISRI recommends that shippers, carriers, ports, and U.S. and Chinese authorities work together to identify ways to minimize scrap cargo theft in China. Complicating trade is the steam ship lines’ opaque operations at these ports, the use II. METHODOLOGY of second leg carriers after trans-shipment, Venable, in coordination with ISRI, sent invitations to participate in the Survey to a and the significant representative sample of ISRI members. These invitees were provided a Survey limitation on carrier Participation Form, an Excel Spreadsheet template for recording and transmitting cargo liability.” theft data to Venable, and were advised in writing of the following rules for participating Global Trader of in the Survey: Nonferrous Metals

 Participation in the Survey is voluntary.

 All data used in the Survey will be collected by Venable on behalf of ISRI. Venable will treat all information submitted by participants as confidential and will not disclose it in its raw form to any other participant or third parties.

 The data collected and reported will not include information about prices or future forecast information. All information provided by members will be based on data at least three months old.

 The Survey requires that at least five members provide data and that no individual member’s data represent more than 25 percent of the data collected.

 All published data will be reported in aggregated form so that information relating to individual members is not disclosed and cannot be identified.

 The Survey will not provide any judgment, commentary, or recommendations regarding members’ conduct.

 Members are advised not to discuss competitive issues with other members, including other member-specific data, absent prior approval of antitrust counsel.

Of the [117] members invited to participate in the Survey, [18] members (the “Participants”) submitted data on suspected cargo theft from containers in transit or in customs at ports in China between 2011 and 2013. Once data was received from Participants, Venable combined the data into a master data file and removed all company identifiable information.

“Our industry would III. SUMMARY OF SURVEY FINDINGS1 be well served to be made regularly aware of which ports thefts A. Impact of Suspected Cargo Theft in China from containers are occurring so that Trade data from the U.S. Commerce Department show that the U.S. exported $2.9 individual shippers billion of copper and copper alloy scrap and $2.3 billion of aluminum-based scrap to can direct their China and Hong Kong in 2013. While the Survey results indicate that 5 ports in the shipments to safer ports. Pearl River Delta accounted for approximately 60% of suspected cargo theft incidents in 2013, detailed trade data from the PIERs database indicate that shipments to Hong Shippers are Kong and the Pearl River Delta ports accounted for around 10% of all U.S. copper suffering losses at an scrap export sales to China in 2013 (~$290 million), a finding broadly in line with alarming rate at some Commerce Department trade data for China and Hong Kong. Chinese destinations, and consumers in those regions will Based on the sample of Survey results, official trade statistics and a review of more need to take action to than 10,000 recorded copper and copper alloy scrap shipments to China that were put pressure on all provided by PIERs and broken out by company, destination port and value, ISRI chief parties involved in economist Joe Pickard estimates that the annual value of cargo theft of U.S. copper the clearing, inspection and scrap exports to China was actually closer to $5 million dollars in recent transportation of our years. Including aluminum-based scrap, that figure rises to approximately $10 goods so that our million per year. products can be securely delivered without fear of theft. Upwards of 3-5% of all copper scrap container shipments to the Pearl River Delta ports are at risk of cargo theft. Should this situation continue, suppliers will continue to seek more secure The Survey results suggest that the volume and financial impact of suspected cargo theft destinations for metal in China has increased since 2011. See Fig. 1. In total, Participants reported losses of as they have been over $2 million from 548 incidents of suspected cargo theft in China between 2011 and doing for some time 2013. In 2013 alone, Participants reported losses of nearly a million dollars. This loss now.” represents an 82.2% increase since 2011, with the number of incidents increasing by Robert Stein 161.9% during the same time period. See Figs. 2 and 3 (Trendlines for No. of Thefts and Sr. Vice President, Claimed Amount). The average size of a reported loss in 2013 was $2,860.00. These Alter Trading results are largely consistent with media reports that thefts usually involve the skimming Company of relatively small amounts of scrap from containers in order for thieves to avoid immediate detection.2

1 The survey requested various criteria related to reported scrap theft, including date of claim, claim amount, grade of scrap, reported pounds short, steamship line, port of origin, port of loading, transshipment port, and destination port. This Report summarizes the data received – in some cases Participants were unable to provide complete information for each of the aforementioned criteria. As a result, this Survey highlights potential issues involving cargo scrap in China but does not represent a statistically valid data analysis. 2 Fraud and Theft in Scrap Export, Scrap 104 (July/August 2012).

Fig. 1 Suspected Cargo Theft Financial and Volume Impact

No. of Percent Claim Amount Percent Pounds Percent Thefts Increase Increase Short Increase Prior Year Prior Year Prior Year 2013 330 161.9% $944,094.00 82.2% 680,871 67.9% 2012 126 36.9% $518,000.00 -11.6% 405,392 19.8% 2011 92 -- $586,129.00 -- 338,363 -- Total 548 -- $2,048,223.00 -- 1,424,626 --

Fig. 2 No. of Thefts Trendline

Fig. 3 Claim Amount Trendline

B. Types of Scrap Subject to Theft

The Survey results suggest that suspected cargo theft in China has focused primarily on copper and other nonferrous metal scrap. See Fig. 4. The grades of scrap subject to suspected theft were generally the same during the Survey period (2011 – 2013). The most common grade of scrap by total pounds short in 2013 was Zorba with 191,833 pounds short for a monetary loss of $158,000.28.3 Other common grades included Birch (26 reported incidents) and Talk (10 reported incidents).

The Survey results generally align with recent media reports – a 2013 article published in Scrap, for example, reported that “Criminals target copper most often because it has one of the highest market values of the commonly exported base metals, but to a lesser degree, they also steal aluminum, brass, and Zorba from containers.”4

Fig. 4 Examples of Suspected Cargo Theft Grades5 2013 Grades 2012 Grades 2011 Grades Copper Copper Copper  Birch  Candy  Cliff “We would like to  Cliff  Cliff  Barley work with US  Droid  Barley  Droid shippers and  Copper bearing  Droid  Birch Chinese scrap  CU/AL Chops From 68-  Birch  Talk consumers to 97.5%CU  Shredded Copper Yokes tackle this  Talk  Talk problem. Aluminum Aluminum Aluminum  Zorba  Zorba  Zorba This needs to  Taint/Tabor  Taint/Tabor  Tense include the  Tense appropriate Brass Brass Brass  Honey  Honey  Honey Chinese authorities  Brass Breakage  Ebony to investigate and  Ebony prosecute those  Ocean who steal scrap Stainless Steel – N/A Stainless Steel Stainless Steel – N/A from containers.”  Zurik Misc. Parts Misc. Parts Misc. Parts Midwest Broker  Ingots  Elmo  Ocean  Shelmo  Elmo

3 References to specific grade of scrap are based on the Institute of Scrap Recycling Industries Scrap Specifications Circular 2014. http://www.isri.org/docs/default-source/commodities/specsupdatesept2013.pdf?sfvrsn=2 4 Deirdre Bannon, Vanishing Act, Scrap (November/December 2013). 5 References to specific grade of scrap are based on the Institute of Scrap Recycling Industries Scrap Specifications Circular 2014. http://www.isri.org/docs/default-source/commodities/specsupdatesept2013.pdf?sfvrsn=2

C. Export and Transportation Characteristics

The Survey data for 2013 suggests that scrap cargo theft is dispersed across a broad 6 segment of steamship lines and destination ports in China. According to the Survey data, for example, suspected cargo theft involved 18 steamship lines, including, among others, CMA (154), MAERSK (31), Hyundai (25), Mediterranean Shipping Company (MSC) (29), and Korea Marine Transport Co. (KMTC) (13).

According to the Survey, the vast majority of shipments that involved the theft of scrap entered China through entry ports in or around Hong Kong (208) and Shanghai (32) (over 70%). Fig. 5 (Map of Problematic Entry Points). Most of the shipments to Hong Kong were subsequently transshipped to final destination ports within the Guangdong

province. In total, the Survey data for 2013 reported cargo thefts involving 21 ports of final destination in China.

Fig. 5 (Map of Problematic Entry Points)

6 The Survey only requested information on steamship lines and ports for 2013.

From Hong Kong, for example, a significant volume of scrap appears to be transshipped to destination ports within the Pearl River Delta, Guangdong province, including ports in Sihui/Mafang (131), Zhaoqing (35), Sanshui (17), Wuzhou (9), Nanhai (6). See Fig 6 (Pearl River Delta Transshipment). Together, these five ports appear to represent 60% of the total cargo theft reported in China for 2013.

Fig. 6 (Pearl River Delta Transshipment)

“We have seen an increase in claims of loose high volume, high value grades. Because loose scrap only has one scale weight before leaving the plant, there is less ability to decipher legitimate weight issues versus theft.

Said another way, the theft magnitude may be even greater than IV. ANALYSIS AND RECOMMENDATIONS currently estimated because some Taken together, the Survey results suggest that scrap theft in China is a growing and weight claims are industry-wide problem. not considered theft.” First, the volume and financial impact of suspected cargo theft in China appears to have increased significantly since 2011. See Fig. 1. In total, Participants reported losses of Ohio Processor over $2 million from 548 incidents of suspected cargo theft in China between 2011 and and Broker 2013, with almost one million dollars of losses in 2013 alone. Extrapolated across the

entire scrap industry, the data suggests that cargo theft in China is a multi-million dollar a year problem. The annual value of cargo theft of U.S. copper scrap exports to China was actually closer to $5 million dollars in recent years. Including aluminum- based scrap, that figure rises to approximately $10 million per year.

Second, the Survey results suggest that most cargo thefts have involved shipments that were transshipped to the Pearl River Delta through ports in or around Hong Kong. Over

60 percent of the reported thefts in 2013 involved ports in the Pearl River Delta (Sihui, Zhaoqing, Sanshui, Wuzhou, and Nanhai). These results are supported by numerous recent media and industry reports on scrap theft in China. According to a 2013 article published in Scrap, “today’s hot spots include transit ports in Hong Kong and Southern China, including those along the Pearl River Delta . . . .”7 Other reports have specifically

called out thefts at ports in Sanshui, Sihui, Huizhou, Huadu, Zhaoqing, and Nanhai within

the Pearl River Delta.8 At least one P&I club has warned its customers of scrap cargo 9 theft on transshipments from Hong Kong to mainland China.

Third, the Survey results confirm the challenges that shippers face in protecting their cargo in China and other points overseas. In particular, transit ports present a particular risk, as cargo may sit at the port or on board a carrier in the port harbor for several days before the cargo is “routed to [its] final destination via smaller, more localized transport . . . .”10 This approach allows criminals to steal significant amounts of scrap without having to deal with transporting a full container of metal. It also minimizes the risk that the theft will be discovered until “the company that purchased the metal receives the

container and weighs it . . . .”11 The shippers, for example, have little to no insight into

the status of the cargo during the transshipment to smaller feeder vessels for delivery inland.

In addition, “many international shipping terminals do not have protective measures such as fences and security cameras, making them ill-equipped to counter thefts.”12 These factors make it difficult for shippers, carriers, and port authorities to know exactly where or when a theft might have occurred. As a result, it is difficult for shippers, carriers, ports, and customers to determine which party to a transaction should bear responsibility for a theft. Shippers, who lack control over the cargo while in route, expect that the carrier will bear responsibility when delivering the cargo to the end customer or the

feeder line.

To address these challenges, shippers, carriers, ports, and U.S. and Chinese authorities must work together to identify ways to minimize scrap cargo theft in China. ISRI recommends the following as steps to address this industry-wide problem:

7 Dan Sandoval, Stealing Business, Recycling Today (Jan. 7, 2013). 8 Deirdre Bannon, Vanishing Act, Scrap 67 (November/December 2013); Dan Sandoval, Stealing Business, Recycling Today (Jan. 7, 2013); Fraud and Theft in Scrap Exports, Scrap 104 (July/August 2012). 9 UK P&I Club, LP Bulletin (June 2012), available at http://www.ukpandi.com/loss-prevention/article/830-06-12- theft-of-scrap-metal-from-containers-hong-kong-5415/. 10 Deirdre Bannon, Vanishing Act, Scrap 67 (November/December 2013). 11 Id. at 65. 12 Fraud and Theft in Scrap Exports, Scrap 104 (July/August 2012).

Shippers

 Consider the risks of cargo theft before exporting to China, particularly to customers located in Hong Kong or the Pearl River Delta

 Protect your business through contractual arrangements utilizing commonly understood Incoterms that place responsibility on the buyer for any theft, or consider shipping metals to China FAS (free alongside), which requires the customer to pay for the metal up front. You may also consider shipping CIF (Cost, Insurance and Freight), which requires the seller to pay the costs and freight to bring the goods to the port of destination and to procure and pay for the insurance. However, risk is transferred to the buyer once the goods are loaded on the vessel. ISRI can provide sample contractual language

 Invest in more effective seals and other safety technology (e.g., cameras, GPS tracking) on containers “My company no longer ships to  Take photographs of the container contents at each step while cargo is being customers in the loaded and sealed Pearl River Delta. We couldn’t afford  Use the most direct route from port of origin to customer as possible the risk of theft.”  Utilize the International Maritime Bureau (IMB), the crime fighting unit of the ~U.S. East Coast Exporter International Chamber of Commerce, database to verify the validity and good standing of new customers and shipping companies and to become aware of any potential problems with companies or regions before committing to high-value business

Carriers and Ports

 Increase security when loading / discharging containers and while containers are warehoused pending transshipment to the final port of destination

 Monitor employees and agents for any internal links to reported thefts

 Exert more control over feeder lines to ensure the timing and delivery of all containers to clients

Government Agencies

 Develop task forces and other relevant resources to investigate the problem of scrap cargo theft in China.

 Allocate appropriate resources to investigate and prosecute thefts

ISRI

 Develop a strategy to inform Government Agencies and the Carriers and Ports about this report and advocate for such entities to review and address any existing policies that fail to deter scrap cargo thefts

 Collaborate with the Bureau of International Recyclers to develop and support an ongoing data base, such as the IMB database, in which Shippers can utilize to learn about current and reoccurring cargo scrap thefts

 Develop a list of theft preventative services for protecting cargo, such as high security locks and safety technology

 Develop education and training workshops and related materials to inform Shippers about the risks of exporting into higher risk areas

 Develop sample contractual language to aid Shippers, such as suggested Incoterms that can transfer risks from the Shipper

 Coordinate with Shippers from other industries that are experiencing similar cargo theft issues

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Please contact the Institute of Scrap Recycling Industries staff Eric Harris 202-662-8515, [email protected] or Scott Horne 202-662-8513, [email protected] with any questions about this Report.