The Chinese Government’s ban on the import of certain recyclables and waste announced last year came into force on 1 January 2018. The ban is impacting the Australian waste industry, which now needs to find new markets for recyclables and waste that was previously exported to China.
Local councils and waste operators should be looking at their existing contracts to identify their contractual rights in respect of the ban and ensure that any new contracts entered into include mechanisms to manage further market changes.
What products has China banned?
The ban applies to 24 categories of solid waste, including certain types of plastics, paper and textiles. This reportedly impacts an annual average of 619,000 tonnes of materials (worth $523 million) within Australia.
The ban has led to an uplift in waste exports to other countries, such as Malaysia and Vietnam. However, the waste industries in these countries are developing and do not have the same capacity as China.
The ban is causing increased costs for contractors and is resulting in stockpiling of a number of materials.
Considerations for processing contracts
In order to understand their rights under existing contracts, local councils and waste operators should consider the following issues:
- Risk allocation – Does the contract place the risks associated with changes in the end market on the contractor (or is this shared with council)? In our experience councils generally pass this risk through to the contractor who is made solely responsible for the cost and conduct of the services and product marketing – which means the contractor will, prima facie, be responsible for the increased costs resulting from the ban.
- Change in law clauses – Does the change in law regime under the contract give the contractor scope to pass through its cost increases or renegotiate the prices due to Chinese regulatory changes? This will depend on how the contract has defined a ‘change in law’ (that, is what sorts of changes will trigger relief under the change in law regime in the contract). If this is defined broadly it may include changes in foreign laws which may allow the contractor to use this clause to pass through its cost increases, or renegotiate prices (depending on how the clause is drafted).
- Profit sharing – Does the contract give the council a right to share profits received from product sales? If so, the council should consider how the ban will impact their profit share and work with their contractor to try to find alternative markets to minimise impacts to profits.
- Waste recovery target – Will the contractor be able to meet its recovery target given the changes to the market resulting from the ban? A number of processing contracts contain a ‘recovery target’ which requires the contractor to recycle a certain percentage of incoming materials. Failure to meet the target may have contractual consequences for the the contractor, such as a deduction of the services fee payable that month, or may give council a right to terminate the contract. Contractors who think the ban will impact their ability to meet these targets should be talking to councils to negotiate interim arrangements.
It will also be important to consider the above issues when entering into new contracts. Councils should be aware that given the current market issues resulting from the ban contractors may be less likely to accept risks associated with recycling and product marketing and seek to have councils share these risks or agree to lower recovery targets.