URSABLOG: What Are You Going To Do At The End Of The Line?

A few weeks ago a friend asked me whether I thought there was enough space to scrap the deluge of older container vessels due to be demolished once this current boom is over, which is looming ever nearer by the day. I replied by sending a Google Earth link showing the beaches in Bangladesh used for such activity. I think I may have also replied that there was enough capacity, even in recycling facilities that follow the rules laid down by the Hong Kong Convention, to absorb most of the expected supply. It was, I hope you understand, a natural mistake for me – a shipbroker used to specialising in bulk carriers and tankers, a tramp man so to speak – to make.

Fast forward to this week and another conversation with another friend. He pointed out to me that the more visible containership owners – those in Europe at least – will struggle to get their ships scrapped at all. He pointed me towards the ruling by the EU – that goes back to the Basle Convention – that although ship recycling in general is a sustainable activity, the conditions under which it takes place are of some concern, to say the least:

Concern has been expressed at the international level over the environmental, health and safety standards in this industry, particularly in those countries employing the beaching method of ship recycling. Ship recycling commonly takes place in developing countries which tend to have a competitive advantage as they provide a pool of low cost labour, may have weaker environmental protection / worker health and safety regulations, and have national demand for the outputs of the activity (predominantly scrap steel). Poor enforcement of regulations relating to this activity means that problems with local environmental pollution are commonplace and incidents of worker injury and fatality are high.

Even though twenty Indian recycling have applied to join the EU approved list, none have been accepted. According to BIMCO, two inspections took place in 2019:

The first report of findings states that “…the applicant appears to have a well running facility with a suitable organisation… [But] compliance could not be confirmed for demonstration of the control of leakage in particular in the intertidal zone.” Amongst other items, the report also notes that wastes are sold for re-use without sampling for hazardous materials.

The second report indicates no major failures at the facility itself.

However, both reports indicate that the local infrastructure in terms of hospitals and the downstream waste management outside Gujarat are unsuitable.

But what of the Hong Kong Convention you may ask? I certainly did. Well, my friend said, until it is ratified, EU companies have to comply with the Basle Convention, and the EU rules, which means generally that ships controlled by EU companies – no matter where they are flagged – have to be recycled in OECD countries, and more specifically in one of the EU approved facilities . Those outside the EU are in Turkey, the UK and the US. Turkey does not have the space or the capacity to take any but a few of the smaller ships, and the US – as with most thing in shipping – does its own thing with its own fleet. The UK needs some money and some business these days, but I cannot imagine it has the facilities or resources – let alone the labour with its current position on immigration – to deal with the dismantling of large containerships. Those within the EU are geared towards more complicated and smaller ships, like offshore installations and other, smaller craft.

This raises a number of issues for me, for shipping and for the developing world.

The residual value – i.e. the scrap price – of any ship is an important factor in the economics of shipping investment. Contrary to the assumptions of many, ship recyclers pay a great deal of money for the privilege to scrap a ship. A fairly small container vessel – 2,500 teu for example – has a light displacement tonnage (ldt - the measurement of all the solid material on a ship) of around 12,000 tonnes. Buyers in India, Bangladesh and Pakistan will pay US$ 570-590 per ldt, or US$ 6.8 – 7 mill per vessel. Turkey will pay US$ 3.12 mill per vessel. In any case this is not an insubstantial amount of money. Shipowning companies are very unlikely to throw ships away, especially because that is inherently environmentally unfriendly as well, very much so. This money matters.

One solution is to sell the ships on to other owners – perhaps chartering them back in the meantime – so that the new owners have the headache of disposing of the tonnage. However this is unlikely to be an immediate solution even if they start selling them off now. The EU authorities are likely to take a dim view of companies that sell tonnage on, and then within the space of a year or two end up on the beach in unapproved facilities anyway (whatever the prevailing market conditions), going against the spirit, and the letter, of the Basle Convention.

Why am I focussing on the EU so much? Well three of the top ten container shipping companies are based in the EU. On top of that, MSC, the largest liner operator in the world, is based in Geneva, Switzerland. There is a huge amount of tonnage that will have to be scrapped that will come from these companies alone, let alone other companies. None of these companies have been shy in buying tonnage in the last couple of years; they certainly had the cash to do so.

But, and I realise that I am about to leave myself open to all sorts of criticism here, I wonder at the wisdom of having such a black and white implementation of the rules. What the above report highlights is that not only do the ship recycling facilities have to be up to proper environmental and health and safety standards, but the local infrastructure – in terms of hospitals and waste facilities – have to be upgraded too. This requires investment, and is surely out of the hands of ship recyclers unless they build their own hospitals and invest in downstream waste management for their own facilities.

In the meantime, the rich – and no doubt well meaning – EU expects the developing world to upgrade all manner of infrastructure (in countries not especially known for speed of action, or a lack of corruption when large scale infrastructure projects are concerned) before their ships can be recycled there again. This absolutist approach strikes me as hypocritical – don’t do it like we did it – especially when they are not providing the means to assist them. “We don’t want you to do this work until you can do it properly and to our standards.” In the meantime… they stay permanently developing countries. A step-by-step approach, rather than an absolutist one, seems to be fairer to everyone, but I am probably missing something.

In the meantime, a hybrid approach – with transparency and best ESG practices – seems to be favoured by at least one of the major EU liner operators although they don’t seem to have scrapped a ship under these conditions for over eighteen months, although this is hardly surprising considering the current market.

So we are left with a huge amount of ships due to be recycled – that can be made into all sort of useful things, like rebar to help build hospitals and downstream waste management facilities – that have no where to go except Turkey, and the price for ships sold to Turkey will surely go down as demand for space there goes up. In the meantime be prepared for large amounts of ships to be laid up for an indefinite amount of time with their own risks of environmental harm.

Of course this does not only apply to containership owners: highly visible bulk carrier and tanker owners will be subject to the same rules too. But there are signs that they have already realised this and are making the appropriate actions – which appears to consist of selling off ships well before they reach the age of scrapping. But this can all change when the market changes – capesizes of twelve years old were being scrapped in 2016 – and we can only hope that this doesn’t happen again soon, because there is no guarantee that it won’t.

In the meantime watch out for the calls of owners of more modern fleets of any ship type for more scrapping when the market does fall. They will say that these older ships need to be scrapped because they harm the environment through excess emissions, or whatever. They will not say that this is because the fleet needs to downsize to cure oversupply, because – of course – this does not apply to them.

Shipping itself is not short of hypocrisy of course, but the one lesson that should be learnt by anyone getting involved in ship recycling is that ships are sold for demolition solely for economical reasons – not age, not environment, not obsolescence – i.e. that a ship goes for scrap when an owner realises that they will probably not get any return from further investment in the vessel. That is a decision made by the owner alone, and depends – somewhat obviously perhaps – on the prevailing price that scrap buyers are willing to pay. But they also have to be able to buy them.

In order to ease this process, I feel that more steps should be taken by those making and enforcing the rules to help the recyclers of ships to meet those rules as quickly as possible, even if it means only incremental progress. Otherwise the sight of ghost container ships at anchorages around the world – accidents waiting to happen – will increase without the end users putting recycled materials to the best use as quickly as possible. In the quest for a sustainable world this not only seems to me to be reasonable, but essential.?

Simon Ward

www.ursashipbrokers.gr