The state of scrapyard flags: A serious economic incentive. But is it worth the trouble?
Until the 1960’s, shipbreaking generally occurred in industrialized nations. However, environmental and human safety regulations jolted the industry when the Basel Convention, IMO, and ILO required newer, mechanized procedures for shipbreaking in the European Union.
The goal of the EU’s Ship Recycling Regulations (SRR) was to eradicate substandard – and in many people’s opinions barbaric – shipbreaking practices. Although asbestos pollution was a primary driver for the reforms, other environmental hazards existed in shipbreaking such as oily water and chemical remnants in improperly cleaned tankers. Additionally, the labor required to beach large vessels at high tide and manually blowtorch ships into pieces is dangerous and oftentimes fatal.
While EU scrapyards successfully curtailed their substandard shipbreaking practices, many developing countries were unwilling to make the same adjustments. Countries with cheap available labor and minimal safety and environmental standards could continue to operate at a much lower cost than their progressive counterparts in Europe. As a result, many scrapyards in Southern and Southeast Asia were able to offer a better price for scrap metal. By 2013, 71% of the world’s shipbreaking by tonnage occurred in developing countries, primarily India, Bangladesh and Pakistan.
Although there was a bargain rate for scrap in Southern Asia, many shipowners had their vessels flagged in states that ratified conventions prohibiting scrapping at substandard locations. Thus, a market opportunity existed for flags that could – for a fee – arrange a last-voyage flagging, good for a one-way trip to the South Asian shores. The transaction could be so smooth as to provide a vessel’s flag transfer en route from its last unload to the scrapyard. Some registries that have notably created a business with this practice are St. Vincent & the Grenadines, St. Kitts & Nevis, Tuvalu, and Comoros.
Certain flags have also been known to look the other way for vessels that clearly did not meet surveying standards, but wanted to squeeze out their last breaths of life bribing corrupt port authorities and trading away for an extra buck.
Scrapyard flagging provides many members of the shipping world with much-needed profitability and flexibility in an industry that is increasingly wrought with regulation. For example, the MV Justus hit the scrapyard this past year after its owner was declared insolvent. In order to minimize losses, the insolvency administrator and financing bank chose to scrap the container ship at the Alang scrapyard in India because Alang could offer the best price.
Today’s climate is not very conducive to the ship recycling business. With manufacturing faltering and lowered expectations for long-run industrial production, China is sitting on a plentiful supply of steel billets. Billets are an intermediate casting. They were produced in a foundry, but they still require additional processing before becoming a finished product. Specifically, a billet is a ength of metal with either a round or square cross-section – almost like a two-by-four – that can be stored easily.
Steel billets compete directly with ship recyclables, so much so that scrap prices have steeply declined by more than 20%, or $100/LDT,* since their 2014 peak in August. While many would think to hold off scrapping their vessels at the bottom of the market, the precipitous and momentous price decline has scrap metal buyers thinking that they may find an even cheaper market in the future. They will hold off on their buying and reduce the market demand for scrap. Therefore, the price will actually continue to fall. This is a self-fulfilling prophecy of expectation for scrap buyers.
Will business in South Asian scrapyards pick up as scrap metal rates fall, or will shipowners choose to avoid the process altogether? The ship recycling market is certainly shaping up to be an interesting one in 2015.
*The light displacement ton (LDT) is the unit for the weight of a ship without anything on board. It is the standard metric for valuing scrapped ships.
Sources:
http://www.bloomberg.com/news/articles/2015-02-12/european-ships-sneak-to-india-s-demolition-yard
http://www.seatrade-global.com/news/asia/settled-pattern-on-demolition-p...
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