Shipbreaking: breaking badly

Date: Monday, April 23, 2018
Source: AJOT

Shipbreaking is essential to not only the shipping industry but the global economy. With lower prices for steel scrap and a glut of steel products, there is a tremendous over capacity in the shipbreaking facilities.

To understand global shipbreaking, and all its complexities, it’s necessary to fathom everything from the price of steel in India to lack of demand for ferrous scrap in China, from construction practices in Bangladesh to manufacturing practices in Turkey, from bankruptcy protocol in Germany to various government subsidies around the world.

Shipbreaking is a billion-dollar-a-year industry that is largely tethered to South Asian yards. Shipbreaking in India, Pakistan and Bangladesh accounts for between 70% and 80% of global output. That’s largely because the South Asian players, with their outmoded and dangerous practices and low worker wages, can offer substantially more money for scrapping ships than competitors elsewhere, especially their primary rivals in China and Turkey, which have spent substantially on shipbreaking yards in recent years, but find themselves being consistently outbid for business.

Scrap rates vary considerably. According to figures compiled by environmental advocate, non-governmental agency Shipbreaking Platform, South Asian yards now offer about $450 per light displacement tonnage, or LDT, while Chinese yards offer only $210 and Turkish yards slightly better at $280 per LDT. A large container ship weighs in at around 25,000 LDTs. That translates into $11.25 million in India, but only $7 million in Turkey and $5.25 million in China.

“Most of the ship owners just care about top dollar, so even if the difference is just 200,000 euros, they will keep going to South Asia,” said Nicola Mulinaris, the communications and policy officer at Shipbreaking Platform, which monitors the industry and advocates for better environmental and worker standards.

Scrapping decrease

Shipbreaking Platform releases an annual survey on the industry. Last year, the organization reported, the industry globally scrapped 835 ships, which totaled 20.7 million gross tons. That’s a substantial decrease from 2016, when 27.4 million tons were scrapped. The number of scrapped ships has fallen by more than 30% from the boom days of 2012-2013.

Shipbreaking is divided pretty evenly among ship types. According to Mulinaris’s research, last year, for example, saw the demolition of 170 bulk carriers, 180 general cargo ships, 140 containers, 140 tankers, 20 vehicle carriers, 14 passenger ships and 30-40 oil and gas related units, which include platforms and drill ships. Most fall into the category of small and medium-sized ships, ranging from less than 500 gross tons to 25,000 gross tons, according to one market research survey.

The lower number of ships recycled in recent years reflects the dramatic fall in steel prices that took place beginning in 2015. That was largely because of overproduction in China, coupled with a steep fall in demand. Chinese producers flooded global markets with cheap steel. In India, that steel supply-and-demand mismatch was exacerbated by a downturn in domestic demand for steel and devaluation of the rupee, which made shipbreaking pricing much more difficult. Beginning in 2016, South Asian yards could offer only about $290 per LDT, down dramatically from $500 per LDT offered during the years before.

But steel prices have stabilized globally and analysts expect 2018 to be a growth year. A study by the Japan International Cooperation Agency has forecast the acceleration of global shipbreaking, notably oil tankers and container ships, from now on, but especially from 2020 until 2023. This reflects the scrapping of ships built during the later half of the 1990s, with a useful life of 26 or 27 years.

India is the clear leader in number of ships recycled, although Bangladesh led the pack in terms of gross tonnage, perhaps a better gauge of revenue. Pakistan was third in terms of gross tonnage, although Turkey broke more ships. The EU, by contrast, accounted for about 0.3% of gross tonnage. (see chart above).

Breaking Badly

South Asia’s shipbreaking industry is centered on stretches of coastal beaches: In Alang, India; in Chittagong, Bangladesh; and in Gadani, Pakistan. Aliaga, in Turkey, has developed as that country’s shipbreaking center, while Xinhui and other southern ports have established shipbreaking yards in China.

According to Shipbreaking Platform’s research, there are 140 shipbreaking companies in Bangladesh, 50 active companies in India that have around 150 plots, and 40 companies in Pakistan, operating 130 plots. The industry employs 15,000 workers in Bangladesh, and 10,000 workers in India, although, said Mulinaris, “these numbers reach peak of 40,000 in high season,” with a high reliance on unskilled, migrant labor.

Much of the labor force in South Asia lives in squalid conditions. Workers break ships on beaches with dangerous and polluting methods that environmental advocates vehemently oppose. These practices stand in stark contrast to shipyards not only in Western Europe and the US, but in Turkey and China as well. (see sidebar on page 6)

“If ships are not cut in a proper way, there’s a huge impact not only on humans, but on the environment,” said Mulinaris.

Indian shipbreaking boosters counter that the bigger Indian yards are improving and point to a recent $76 million soft loan from Japan to upgrade Alang. “Indian yards have invested heavily in improving the infrastructure and the standards of ship recycling keeping in mind the future regulations such as the Hong Kong Convention and the EU Ship Recycling Regulation,” wrote Kanu Priya Jain, in an email. Jain heads the green initiative for GMS, which claims to be the world’s largest cash buyer of ships for breaking.

India and Bangladesh can offer a substantial premium for the price of recycled ships because of more than merely variations in the workplace environment, however. India, for example, is notoriously protectionist when it comes to domestic industry. After the price of steel plummeted, Indian domestic steel producers lobbied New Delhi. The Indian government responded by imposing a “minimum import price” on Chinese steel in early 2016 and levied more anti-dumping duties. The result was a substantial increase in the price of domestic steel, which continues to this day.

Bangladesh is heavily dependent on the consumption scrap steel. According to a 2016 study published in the Journal of Industrial Ecology, shipbreaking provided just over half the country’s demand for raw materials and 37% of the demand for finished steel products. What’s more, most of this steel isn’t melted and mixed with iron in furnaces, as is common elsewhere. Instead, it’s rerolled at low temperatures, fashioned into steel bars and then sold to the construction industry. The country’s smaller rerolling mills are almost exclusively dependent on scrap from shipbreaking, according to the Journal.

Because it produces so much steel itself, China, by contrast, has very little demand domestically for scrap, with ferrous scrap imports declining steadily from 2009, a record 13.7 million tons, to just 2.2 million tons in 2016, about what it exported last year. That downturn corresponded with the decline in global market share in its shipbreaking industry from 31% of the total worldwide business to just 12% in 2016, according to one estimate.

In stark contrast to that in South Asia, China’s shipbreaking industry is state-of-the-art, with many facilities, built to exacting environmental standards in the years before the financial collapse of 2008. Yard owners believed, erroneously as it turned out, that a combination of tougher environmental regulations and buoyant global trade would accelerate the retirement of many ships.

Overcapacity

That industry now suffers from enormous overcapacity. China has two or three shipbreaking yards each with capacity of one million to 1.5 million tons annually, according to Jain. That’s more than the entire country recycled in 2017.

The Chinese government shares some of the responsibility. It attempted for years after the financial collapse to prop up Chinese ship breakers. In an effort to promote its shipbuilding industry and foster greener ships, Beijing had promoted the breaking up of old ships in homegrown yards by offering subsidies of about $200 per gross ton. But those subsidies ended in December, after a two-year extension.

Turkey offers a slightly different take. It is the world’s largest importer of scrap steel, which Turkish manufacturers use as raw materials for producing automotive, railway and machinery products. So, there’s a ready market for recycled steel in Turkey, whose shipbreaking yards boost of green practices that rival those in China.

The steamship industry’s own woes have impacted the recycling market as well. Notably, scrapped ships have flooded the market from lines that have gone bankrupt. The highest profile was Hanjin Shipping, which a South Korean court ordered liquidated in February 2017. Many of the company’s so-called ghost ships, stranded in ports around the world, ended up being scrapped.

 

But these numbers pale in relationship to a string of German ship liquidations, which accelerated last year. They included Rickmers Holding, Germany’s third largest shipping line, which held more than 100 ships. Most of these were scrapped in South Asian yards because they could fetch more money than being sold whole or dismantled elsewhere, a decision made by creditor liquidators, not ship operators. “Many insolvency liquidators are duty bound to achieve the highest proceeds for their creditors, or they could risk being made liable,” a spokesman of the German Shipowners’ Association told Handelsblatt newspaper last year.

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