Where next for breakers?

SHIP scrapping is on a roll. The amount of tonnage scrapped in 2008 soared 300% on 2007 figures, despite record low prices.
But will the impact of the International Maritime Organization’s Convention on the Safe and Environmentally Sound Recycling of Ships force market prices down further still?
With a newer, larger and better-maintained fleet on the horizon, it is questionable how many ships will be scrapped using green recycling methods.
The IMO Conference in Hong Kong last week adopted the convention but the date of implementation is still unclear. It is likely sometime between 2013 and 2016.
“In the last two scrapping spikes, first in the 1980s and then late 1990s into the new millennium, we saw heavy scrapping that ran for several years before the markets recovered. There has been a good start of scrapping, but remember today there is a much bigger fleet and it is also much younger,” Charles de Trenck, managing director of Transport Trackers, a Hong Kong-based independent advisory service, said.
Too late then, it would seem, to capitalise on the resurgent supply in vessels queuing to be scrapped in one of the most vicious downturns in shipping demand.
Cashflow
Guesstimates vary as to when the market will return but 2010-2011 is the most cited forecast, somewhat ahead of the likely enforcement of the convention.
So the question is, what will be the likely impact of the IMO convention on the scrapping market?
Prices for scrap are in a state of collapse, with today’s estimates for scrap tonnage in the US$210-US$240 per ldt range compared to a record high US$770 per ldt paid in August 2008.
By comparison, shipowners have tended to use a historical price of between US$250-US$300 per ldt in their scrap value calculations when assessing cashflow projections and investment analysis in sale and purchase deals.
Reasons cited for the drastic fall in scrap prices include breakers’ inability to raise credit, steeply falling steel prices, a lack of demand for scrap steel and a lack of scrapping facilities in the face of an increasing amount of tonnage looking to be scrapped, thus skewing the supply-demand equation to the breakers’ advantage. Worldyards.com managing director Matthew Flynn is certain that in the short term the likely impact of the IMO convention will be a very real sense of the “finite demolition capacity available”.
“With tighter restrictions, where does this leave the traditional breakers?” he asks.
China, which had virtually withdrawn from the market in recent years, became more active in 2008, taking advantage of falling rates and owners in need of a reliable place to scrap their tonnage, according to a recent Gibson report.
But China’s lead has not been followed up by others thus far. According to market reports both the Philippines and Vietnam have been approached by Japanese shipowners looking for alternative sites to recycle old tonnage.
Vietnam was unambiguous in its rejection of the idea.
The Philippines did not reject the possibility outright but the only location considered as a possibility is Batangas, where an earlier ship-scrapping facility near Cebu had been stopped due to environmental concerns.
As the scrap gained from ship recycling invariably remains in the country of demolition, countries such as Burma, where development has come to a virtual standstill, would be ruled out of any consideration.
The squeeze on scrapping capacity and the possibility of the consequent downturn in scrap prices could arrive incrementally rather than overnight as the convention comes into force.
Before the conference in Hong Kong, the territory’s Marine Department assistant director Patrick Chun said: Governments who sign up to the convention will be urged by IMO to encourage shipowners to comply with the guidelines ahead of it coming into effect.”
The Hong Kong Convention focused on design and operating improvements to ensure the safe dismantling of ships.
The first part includes a requirement for yards to list materials that have been used to build a ship.
There will be a mandatory requirement by owners to maintain this inventory during the lifetime of the ship. There will also be a list of hazardous materials that are not allowed during construction or maintenance.
Requirements
The second part, which should directly impact on the capacity issue, is the formation of a ship recycling plan to show how the vessel should be dismantled, Mr Chun said.
Hong Kong has no facilities for the scrapping of ships and as a result will have minimal powers to directly influence the upgrading of extant breaking facilities.
“But China could definitely encourage its shipowners to use only those breakers that are compliant with the requirements of the convention from an early date,” he said.
Additional encouragement for breakers to upgrade in line with the requirements of the convention can be brought directly to bear on traditional breakers through an IMO cooperation program that is urging flag states such as Hong Kong to offer technical assistance to nations seeking to modernise the way they recycle ships, according to Mr Chun.
Hong Kong Shipowners’ Association managing director Arthur Bowring said owners and operators are being encouraged to start preparing for the implementation of the convention by listing the materials contained in vessels in their existing fleets.
Interim guidelines are being drafted “that can be used before the convention comes into force. Hong Kong and indeed the global shipping industry greatly supports the convention,” he said.
Aside from requirements that a certain number of countries representing a set percentage of the world fleet sign up to the convention before it is adopted, Mr Chun said discussion is also taking place about involving the recycling industry.
One of the criteria for adoption being discussed is whether there should be a certain level of support from countries where most recycling takes place before the convention can take effect, he said.
It is difficult to assess how much environmental concerns can alter the market without the force of law.
In 2008, 14.7m ldt was scrapped worldwide, but in a recent address to IMO delegates International Ship Recycling Association (ISRA) board member James McFarlene conceded: “Within our current member yards there exists the capacity to process on an annual basis 3.5m ldt-4m ldt. Two additional yards currently considering joining ISRA will significantly increase this capacity. Unfortunately this potential is significantly under-utilised at this time.”
The 4m tonnes of capacity available at green shipbreakers, according to ISRA, was indeed sorely underused, with China only accounting for 1.1m ldt. The recent attempt to close the breaking facilities in the world’s largest shipbreaking nation, Bangladesh, and the subsequent rescinding of the move might be characterised as environmental concerns clashing with the market and the market winning. But Mr Flynn is confident that both can eventually be winners. “It is hard to imagine that any facilities, be they green or otherwise, will not eventually respond to the demand,” he said.

Additional reporting:
Keith Wallis