Why South Asia Offers More for End-of-Life Tonnage

by Dr. Kanu Priya Jain

After closely following the ship recycling industry for more than four years, I have realized that certain groups and organizations within the industry vehemently oppose the recycling facilities flourishing in South Asia. Umpteen times, such groups have reiterated that beaching yards in South Asia undertake “dirty and dangerous scrapping” with “dire working conditions.” 

They emphasize that these yards invest little or no money in improving the infrastructure and the proper disposal of hazardous waste is often overlooked compared with those operating in Europe, Turkey and China. Such conditions, according to these groups, are responsible for South Asian yards offering more money than the yards located elsewhere to ship owners selling end-of-life (EOL) tonnage. Essentially, the main message put forth by the organizations discussed above is that all recycling facilities operating at South Asian beaches follow exactly the same operating standards, which are harmful and unsafe for the workers and hazardous to the environment. This is claimed by such groups as the main reason why end-of-life ships fetch more money when sold to the recycling yards operating in South Asia.

A little bit of common sense is enough to realize that the claims above cannot be true for all the recycling yards operating in the South Asian region comprised of three different countries – India, Pakistan and Bangladesh. The questioned working conditions might however be truthfully described for certain yards which do not represent the general working conditions prevailing in the region. The fact which everyone associated with this industry must know is that the South Asian yards have made rapid progress in developing their infrastructure in the last few years.

Specifically, yards located in India are at the forefront of this development. By the end of Sep 2017, almost half of the active yards in India were operating (or were in process) under the Statement of Compliance (SOC) with the Hong Kong Convention (HKC), issued by reputed classification societies (ClassNK, RINA and IRClass). This in absolute term means approximately 60 yards out of 120 active recycling yards. Recently, in October 2017, PHP became the first yard in Bangladesh to receive a SOC with HKC from RINA. Such large scale development cannot be shrugged-off with statements putting all yards on a same scale, irrespective of their level of advancement. And of course, this proves that not all yards in South Asia avoid investing money to improve infrastructure.

Here, an interesting point to consider is the fact that even after such massive infrastructure improvements have been taking place in the South Asian yards, they continue to offer higher USD/long ton than China, Turkey and the rest of the world. Obviously, the HKC-compliant yards offer a little less than what is offered by other yards operating within the same country to offset the capital costs and increased operating costs. There can only be two logical reasons for the former. First, these certifications are not good enough and the yards continue to operate in the same manner as they were operating before obtaining the HKC certification. And secondly, there must be some inherent features/characteristics related to the South Asian countries which keep them ahead in terms of offer price. 

As far as the first reason is concerned, it would be unwise to question the integrity and professionalism of reputed classification societies having IACS memberships. Moreover, the real improvement can be seen on these yards during an in-person visit. Therefore, it is important to explore and define the inherent reasons associated with the South Asian countries fueling their ability to offer a higher price.

The economics of EOL ships lies in the end-products derived from them. And these products are country specific depending on the downstream market availability. The main products which are generally recovered from the EOL ships include ferrous scrap, non-ferrous scrap, machinery, and other items such as furniture, fuel, sludge, etc. In most cases, the estimated amount of recoverable scrap steel (ferrous scrap) determines the price which can be offered to a ship owner. Scrap steel is traded at different prices in different countries and it is the major factor which dictates the variation in the offer price at different countries.

The major use of scrap steel in every recycling country is found in steel making. However, the technology used differs from one country to another. The two main steel making processes are (1) production from iron ore in a Blast Oxygen Furnace (BOF), which also uses some amount of scrap steel during the refining process (2) production from scrap steel in an Electric Arc Furnace (EAF). Globally, around 75 percent of the steel is produced by BOF method while the remaining 25 percent is produced by EAF method.

Interestingly, amongst the major ship recycling nations, the percentage BOF/EAF mix in 2016 showed contrasting differences. For example, China had approx. 95/5 mix, India had approximately 40/60 mix, while for Turkey it was approx. 35/65. These numbers clearly justify why generally the imports of scrap steel are more in Turkey (highest in the world in 2016) and India (second highest) than in China. Obviously, such local factors dictate the scrap steel pricing, which is eventually reflected upon the offer price of EOL ships.

In order to compare the South Asian countries with China and Turkey, it is important to understand that when a ship is dismantled in these countries the irregular pieces of steel obtained are earmarked as melting scrap, which is fed into EAFs. This type of steel scrap is only about 40 percent of the total weight of the ship's steel. The remaining 60 percent is derived in the form of plates, beams, girders and angle bars which are generally re-rolled in South Asia and sold at a premium as compared to the melting scrap.

However, this is not the case in China and Turkey, where almost all scrap steel is considered as melting scrap. This difference in end-use of scrap steel and types of scrap steel obtained in major ship recycling countries is another important factor driving the higher price of EOL ships in South Asia. The re-rolling process is simpler and less energy consuming, therefore, re-rolled steel products fetch more money than the melting scrap.

Apart from the two factors discussed above, the amount of non-ferrous scrap obtained from an EOL ship and its market rate is also one of the major factors influencing the offer price. Labor costs, taxes, government duties and other such country specific expenses also play an important role in determining the offer price of EOL ships.

To conclude, it is true that “non-green” practices in the dismantling of EOL ships generally reduce the operating costs of a recycling yard. However, to associate such practices only to a particular geographical region or to a particular method of recycling is incorrect. This is not the actual reason why South Asian yards offer higher prices to shipowners than the Chinese or the Turkish recycling yards. The reasons discussed above should work as an eye-opener for all those who believe that the ship recycling yards in South Asia offer higher price due to the implementation of ill-practices.

The significant improvements undertaken by the South Asian recycling facilities within the last few years must be acknowledged and appreciated by the global maritime community rather than criticized and demeaned because of the use of beaching as a method of docking ships for recycling.

Dr. Kanu Priya Jain is coordinator, responsible ship recycling at GMS (Dubai).

This editorial was originally published in Steel360.