SHIPREC 2013

INTERNATIONAL CONFERENCE ON SHIP RECYCLING WORLD MARITIME UNIVERSITY, MALMO

7-9 APRIL 2013

SHIP RECYCLING MARKETS AND THE IMPACT OF THE HONG KONG CONVENTION

by Dr Nikos Mikelis*

Non-executive director, GMS

SYNOPSIS The paper presents an overview of the contribution the ship recycling industry makes to the international production of steel and also to the production of steel in the world’s largest ship recycling markets, namely in Bangladesh, China, India, Pakistan and Turkey. In this way the paper provides a measure of the relative importance of the ship recycling industry to the five ship recycling countries, as well as to the global production of steel. The paper then discusses the standards of safety and environmental protection that the international community expects from ship recycling facilities, and compares these to what the author has seen on the ground, and to what is being demanded by some politicians and activisits. The paper concludes by highlighting impacts of the Hong Kong Convention that have taken place so far and also impacts that are expected in the future. SHIP RECYCLING IN RELATION TO STEEL MAKING When the subject of ship recycling is addressed within the shipping industry, there is little or no reference to the relation that exists between ship recycling and steel making. It is certainly recognized that ships are scrapped, or recycled, primarily in order to reuse their steel, or in other words, it is recognized that steel making is very important to ship recycling. On the other hand, it appears that there is little understanding on whether steel scrap from ship recycling is important to steel making. For this purpose, the author presents in the first part of the paper certain relevant information and data he has collected, with which he aims to give the reader a better understanding of the subject. Steel production Table 1 shows the twelve largest steel making countries, for the most recent five-year period for which data is available. The data[1] show that global steel production is increasing, notwithstanding the recent economic downturn. The data also shows the uninterrupted growth of China’s steel production, which now represents 45% of the world’s production. Interestingly, China’s production is almost six and a half times the magnitude of the second largest steel producer in the world, Japan. Noting that in 2000, China’s steel production represented 15% of the world’s production, it remains to be seen whether the spectacular lead of Chinese steel making can be retained in the future.

                                                                                                               *  nikos@mikelis.com  

It is worth also noting that in the league of the largest steel making countries, India occupies the fourth position and Turkey the tenth. A first connection may be made here with ship recycling, as China, India and Turkey are three of the five countries that dominate the world’s ship recycling industry.

There are two main processes in modern steel making[2]:

(i) production from iron ore, first of pig iron in a blast furnace, which is then refined into steel in a Basic Oxygen Furnace (BOF). Some steel scrap is also added in the refining process. Around 70%[3,4] of the world’s steel is produced through this process; and

(ii) production from steel scrap in an Electric Arc Furnace (EAF). Around 30%[3,4] of the world’s steel production is based on EAF.

The usage of steel scrap in steel making makes absolute sense, both from the economic and the environmental points of view. A study is quoted[2] whereby the energy requirements for making 1 tonne of steel from iron ore is 23GJ as opposed to 7GJ when using steel scrap. Also, recycling of steel saves natural resources[2] (every tonne of recycled steel saves around 1.1 tonne of iron ore, 0.6 tonnes of coal), and reduces pollution[2] (86% less air pollution, 76% less water pollution, 40% reduction in water usage, and avoidance of generation of about 1.3 tonnes of solid waste). Nevertheless, reliance on iron ore is unavoidable as steel scrap is available in relatively limited quantities. Usage of steel scrap in steel production Some countries have made large investments on large integrated plants for producing steel from iron ore, and may therefore have a reluctance to switch to the EAF method. Contrasted to the world’s 70/30 mix (70% v 30%) of BOF and EAF in 2011, China’s mix was 90/10, India’s 40/60, and Turkey’s 25/75[4]. Figures 1 and 2 illustrate the crude steel production and the utilisation of steel scrap[1] over a five year period in China and in Turkey respectively. Clearly, the

world’s largest steel producer has a lot of room to reduce its production costs and its carbon footprint by progressively basing more of its production on steel scrap.

There are three sources of steel scrap for steel making: (i) “own arisings” (also known as “circulating scrap”, or “home scrap”) which arise internally in steel mills as rejects from melting, casting, rolling, etc; (ii) “new steel scrap” (or “process scrap”) which is generated when steel is fabricated into finished products; and (iii) “old steel scrap” (or “capital scarp”) which is steel scrap from obsolete products and which is collected, traded and sold to steel plants for remelting. Ship steel scrap obviously falls in the third category of sources of steel scrap. Table 2 shows[1] the quantities of steel scrap that is utilized by the global steel making industry, categorised by source, for the most recent five-year period for which data is available. The data reveal that in recent times the market of old steel scrap is around 225 million tonnes annually (ranging between 175 to 250 million tonnes).

489.3 500.3 573.6

626.7 683.9

68.5 72.0 83.1 88.1 91.0

- 100 200 300 400 500 600 700 800

2007 2008 2009 2010 2011

Mill

ion

Tonn

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Figure 1: Steel scrap for steelmaking in China

Crude steel production Steel scrap usage

25.8 26.8 25.3 29.1

34.1

22.6 22.9 21.5 25.3

30.8

- 5

10 15 20 25 30 35 40

2007 2008 2009 2010 2011

Mill

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Tonn

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Figure 2: Steel scrap for steelmaking in Turkey

Crude steel production Steel scrap usage

Steel scrap movements Steel scrap is a commodity that is actively traded internationally. It is often shipped in bulk carriers in parcels of 30,000 to 50,000 tonnes. Table 3[1] shows the annual imports for the largest steel scrap importing countries. Note that these import figures do not include the steel of ships imported for recycling. The first seven countries in Table 3 are all amongst the world’s top twelve steel producing countries. Turkey is consistently, and by a very large margin, the largest steel scrap importer in the world. It is also worth noting that three of the five countries that recycle most of the world’s tonnage (Bangladesh, China, India, Pakistan and Turkey) occupy the top four positions of the table of the largest importers of steel scrap.

The data of Table 3 might give the impression that the USA and the European Union (EU-27), being amongst the world’s largest importers of steel scrap, need to import steel scrap for their steel making industries, and could therefore conceivably support the development of commercially viable ship recycling industries[5]. To understand better the movements of steel scrap, Table 4[1] provides data for the annual exports for the largest steel scrap exporting countries.

Table 2: Steel scrap for steel making by source category (million tonnes) [1]

2007 2008 2009 2010 2011

Total steel scrap use 540 530 440 530 570 100% 100% 100% 100% 100%

Own arisings 197 195 175 190 200 36% 37% 40% 36% 35% New steel scrap 107 105 90 110 120

20% 20% 20% 21% 21% Old steel scrap 236 230 175 230 250

44% 43% 40% 43% 44%

Table 3: Main steel scrap importing countries (million tonnes) [1]

2007 2008 2009 2010 2011

Turkey 17.141 17.415 15.665 19.192 21.460 Korea Rep. 6.887 7.319 7.800 8.091 8.628 China 3.395 3.590 13.692 5.848 6.767 India 3.014 4.579 5.336 4.643 2.929* Taiwan 5.418 5.539 3.912 5.364 5.328 USA 3.692 3.571 2.986 3.775 4.003 EU-27 5.142 4.809 3.270 3.646 3.676 Malaysia 3.688 2.293 1.683 2.292 2.050 Indonesia 1.260 1.899 1.484 1.642 2.157 Canada 1.435 1.674 1.408 2.226 1.911 Thailand 1.805 3.142 1.323 1.282 1.877 * Period Jan-July 2011

Combining the data of Tables 3 and 4 makes it clear that the USA and the European Union are, by far, the largest net exporting countries of steel scrap in the world. In 2011 the USA was a net exporter of 20.37 million tonnes of steel scrap (with the top destination being Turkey with 5.62 million tonnes, second being China with 4.23 million tonnes and sixth being India with 1.21 million tonnes), while the European Union was a net exporter of 15.09 million tonnes (with the top destination being Turkey with 9.94 million tonnes, second being India with 2.24 million tonnes and fourth being China with 0.83 million tonnes). It has also been claimed that Canada has the capacity to recycle internationally trading ships[5] and for that reason it is interesting to look here at Canada’s trading of steel scrap[1]. Canada is one of the world’s largest importers of steel scrap (1.91 million tonnes in 2011), but it is also one of the world’s largest exporters (4.83 million tonnes) making the country the sixth largest net exporter in the world. An interesting detail is that whereas Canada imported from the USA 1.46 million tonnes in 2011, in the same period it exported to its neigbour 3.26 million tonnes. Steel scrap from ship recycling Ships are recycled primarily to recover their steel, which forms approximately 75% to 85% of a ship’s lightweight, or lightship. Lightweight (LDT) is the mass of the ship’s structure, propulsion machinery, other machinery, outfit and constants. Another way of defining LDT is as the displacement of a ship when fully equipped and ready to proceed to sea but with no crew, passengers, stores, fuel, ballast, water or cargo on board. In addition to steel, the recycling process recovers non ferrous metals, machinery, equipment, fittings, and even furniture. Non ferrous metals (eg copper) are particularly valuable and although forming maybe around 1% of a ship’s LDT, they can recover for the recycler up to 10% to 15% of the price paid for the ship. Machinery from recycled ships is often reconditioned and sold for further use in maritime or land industries, or when it is beyond repair, it is cut and sold as steel scrap. Because the chemical composition of the steel used in shipbuilding is controlled by classification society rules and surveys, ship steel has good yield strength, ductility and impact strength. Ship steel scrap is therefore attractive for steel making. When dismantling a ship it is possible to separate flat plates, and lengths of girders, beams and angle bars, from smaller and irregular pieces of metal. The later become melting scrap to be fed to EAF plants, while the former can either be used

directly in construction or road building, or can be heated and re-rolled into bars and rods in re-rolling mills. Re-rollable ship’s scrap can amount around 60% of a ship’s LDT, noting however that sometimes different percentage figures are quoted. As the re-rolling process is simpler and much less energy demanding compared to melting steel scrap, re-rolling finished products have a price competitive advantage, and consequently ship recyclers can command a price premium for re-rollable scrap of around 10% compared to melting steel scrap. Re-rolling is used extensively in South Asia but much less in Turkey and China. Nevertheless, visitors to Chinese recycling yards will not fail to notice big stacks of large rectangular plates awaiting their sale to construction sites. Re-rollable scrap and ship scrap plates that are directly reusable in construction are not melted for the production of crude steel and consequently are not included in the statistics of old steel scrap that were presented in Table 2 above. Ship recycling countries Virtually every country in the world is involved in some ship recycling activities. Often, this is done as a service for disposing smaller ships which might otherwise be abandoned in ports, or even sunk. In a few countries however the recycling of ships is done on a commercially sustainable basis and on an industrial scale. There, recycling companies purchase ships from the international market and recycle them for profit by extracting and selling the ships’ steel, non ferrous metals, machinery, equipment, fittings, and furniture. The web based publication World Casualty Statistics, by IHS Fairplay, provides in April/May of each year statistical data on the number and tonnage (gross tonnage) of the ships recycled in the preceding year by country of recycling. Using this data, the International Maritime Organization (IMO) produced an analysis[6] showing, for the last ten years, the tonnages of recycled ships by country of recycling. The analysis provides data for 82 countries that are recycling ships, with some admittedly achieving very small tonnages. Five of the 82 countries, however, have recycled consistently an average of 97% to 98% per cent of all tonnage recycled in the world. They are in the order of capacity: India, China, Bangladesh, Pakistan and Turkey. Each of the top three recycling States, India, China, and Bangladesh, has a large share of the world's recycling capacity (i.e. between 24% and 31%), while Pakistan and Turkey have smaller but increasing shares of the world's capacity (around 11% and 4%). Turkey, which is the smallest of the top five recycling States, recycles more tonnage than the rest of the world (when excluding the top five recycling States). This information is shown in Table 5 and graphically in Figure 3.

RECYCLING)STATE 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

BANGLADESH 4,893,973))))))) 2,889,908))))))) 3,356,537))))))) 2,113,765))))))) 2,882,503))))))) 1,837,988))))))) 4,176,026))))))) 6,608,531))))))) 3,927,297))))))) 5,837,137)))))))CHINA 3,138,838))))))) 5,582,476))))))) 1,538,067))))))) 151,089)))))))))) 254,146)))))))))) 340,738)))))))))) 927,762)))))))))) 7,737,730))))))) 4,723,151))))))) 5,968,520)))))))INDIA 6,751,349))))))) 5,886,259))))))) 1,619,505))))))) 1,123,487))))))) 852,990)))))))))) 1,332,492))))))) 2,458,113))))))) 7,561,258))))))) 6,533,954))))))) 8,504,517)))))))PAKISTAN 997,236)))))))))) 816,961)))))))))) 209,055)))))))))) 47,530)))))))))))) 186,987)))))))))) 379,601)))))))))) 273,937)))))))))) 2,100,637))))))) 2,443,304))))))) 3,013,926)))))))TURKEY 385,437)))))))))) 280,367)))))))))) 200,183)))))))))) 137,693)))))))))) 148,448)))))))))) 117,817)))))))))) 141,351)))))))))) 557,251)))))))))) 658,473)))))))))) 1,067,425)))))))

Sum)of)top)5)recycling)States 16,166,833)))) 15,455,971)))) 6,923,347))))))) 3,573,564))))))) 4,325,074))))))) 4,008,636))))))) 7,977,189))))))) 24,565,407)))) 18,286,179)))) 24,391,525))))

Rest)of)the)world 209,828)))))))))) 472,221)))))))))) 272,145)))))))))) 198,646)))))))))) 266,571)))))))))) 144,211)))))))))) 302,598)))))))))) 393,113)))))))))) 387,853)))))))))) 624,848))))))))))

WORLD)TOTAL 16,376,661)))) 15,928,192)))) 7,195,492))))))) 3,772,210))))))) 4,591,645))))))) 4,152,847))))))) 8,279,787))))))) 24,958,520)))) 18,674,032)))) 25,016,373))))

%)of)top)5)to)world)totals 99% 97% 96% 95% 94% 97% 96% 98% 98% 98%

Table 5: ANNUAL SHIP RECYCLING VOLUME OF THE LARGEST SHIP RECYCLING COUNTRIES (Data by IHS-Fairplay)

The most appropriate statistical quantity for ship recycling is the lightweight ton (LDT), because this gives a direct estimate of the steel scrap content of the ships in question and at the same time it provides commercially useful information, as virtually all recycling sale & purchase transactions are conducted on the basis of prices per LDT. Nevertheless, the international databases containing particulars of the world’s fleet (e.g. IHS Fairplay) have very limited information on LDT and for that reason IMO has utilized gross tonnage (GT), which in any case is the traditional measure of tonnage in shipping, especially in the regulatory world. In order, however, to produce the overview of the contribution the ship recycling industry makes to steel production, the author requested annual LDT data from the top five ship recycling associations. The data shown in figure 4 was provided in time for the preparation of this paper by the four associations and by shipping agents in Pakistan.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2007 2008 2009 2010 2011 2012

LDT

(m

illio

ns)

Figure 4: LDT volumes of recycled tonnage

BANGALDESH CHINA INDIA PAKISTAN TURKEY

Figure 3: Annual volume of recycled tonnage by country of recycling

(source IHS Fairplay) G

ross

Ton

s

Ignoring the (2% to 3%) contribution from recycling outside the top five recycling countries, the data shown in figure 4 provide an estimate for the global volume of recycled LDT varying between 2.1 and 12.2 million tons, with an average annual of 7.3 million LDT tons. Assuming, as mentioned in the last section, that steel scrap recovered from recycled ships is around 75% to 85% of a ship’s LDT, we obtain an estimate of the steel recovered annually from the recycling of ships of between 1.7 to 9.8 million tonnes, with an annual average of 5.8 million tonnes of steel scrap. Assuming that in India, Bangladesh, and Pakistan 50% of the recovered steel scrap is melted for the production of new steel, while in China and Turkey 90% is melted (with the remaining being re-rolled or reused), we can thus obtain estimates of the total contribution ship recycling makes to the generation of old (melting) steel scrap. This is shown in Figure 5, which, over the depicted six year period, yields between 1.0 to 6.0 million tonnes a year, with an average of 3.6 million tonnes of ship steel melting scrap a year. As the period under review, covering 2007 to 2012, includes both low and high ship recycling activity periods, the above statistics are probably representative of the longer period.

The data presented under section “Usage of steel scrap in steel production” indicated a current annual requirement of around 225 million tonnes of old steel scrap (see Table 2). The annual average of 3.6 million tonnes of melting steel scrap from the global ship recycling industry therefore covers around 1.5% of the needs of the global steel making industry for old steel scrap. To provide a qualitative assessment of the relative importance of the ship recycling industry at the national level in each of the five main ship recycling countries, Table 6 utilises the data for melting steel scrap that were shown in Figure 5, together with data on annually imported ferrous scrap[3]. It is noted that there are occasional differences between the data provided in references [1] and [3].

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

2007 2008 2009 2010 2011 2012

Mill

ion

tonn

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Figure 5: Estimates of ship steel scrap for melting

BANGLADESH CHINA INDIA PAKISTAN TURKEY

In essence, Table 6 quantifies how much of the imported melting steel scrap is provided by each country’s ship recycling industry. In the case of Bangladesh, which has a small steel industry, the contribution of melting steel scrap from ship recycling is very high. In India, Pakistan and China the contribution of melting scrap from ships is also quite high, with the exception of 2007 and 2008, which were years of low volumes of ship recycling because of the strength of the shipping market. Lastly, the case of Turkey appears to be very different to the other recycling countries, because the share of melting steel scrap from ship recycling in Turkey is only 1% to 2% of the total imported quantities of melting scrap. Conclusions on ship recycling as seen from the context of steel production The paper has deduced an average annual production of 3.6 million tonnes of melting steel scrap from the global ship recycling industry. On this basis, the conclusion was reached that the global ship recycling industry covers around 1.5% of the global needs of the steel making industry for old (melting) steel scrap. When considering the many sources of old scrap steel, the assessment of the 1.5% contribution of ship recycling appears realistic. At the same time it is fair to say that on this basis the global impact of ship recycling to the steel making industry must be low. Therefore, whereas the steel making industry is of vital importance to the ship recycling industry, the converse cannot be true when seen in the global context. This conclusion of course does not apply from the perspective of each of the five ship recycling countries, and even more so from the perspective of the three South Asian countries, where an additional contribution is made to the economies of the countries through extensive re-rolling of ship scrap. The assessment on the magnitude of the global contribution ship recycling makes to steel making can help to better understand the forces that determine the prices paid for ships by recyclers. Ship scrap competes with imported steel scrap and as its quantity is relatively small (1.5%) compared to the other sources of scrap steel, it cannot dictate pricing. At times when the freight markets are paying well for ships, the tonnage offered for recycling naturally reduces. Ship recyclers may increase the prices they offer, but there must be a ceiling to these prices based on the price of imported ferrous scrap (ship recyclers in fact look to local steel plate prices as the indicator). If the prices offered by recyclers are insufficient to attract the necessary tonnage that would keep the existing ship recycling facilities active, then recycling facilities have to close down. Conversely, when the freight markets are low, there is a lot more tonnage offered for recycling and consequently recyclers can pay less for ships. If at such times

2007 2008 2009 2010 2011Ship melting scrap 310$$$$$$$$$$$$$$$$$ 735$$$$$$$$$$$$$$$$$ 904$$$$$$$$$$$$$$$$$ 519$$$$$$$$$$$$$$$$$ 748$$$$$$$$$$$$$$$$$Imported ferrous scrap 253$$$$$$$$$$$$$$$$$ 337$$$$$$$$$$$$$$$$$ 545$$$$$$$$$$$$$$$$$ 241$$$$$$$$$$$$$$$$$ 310$$$$$$$$$$$$$$$$$Ship/(Ship+Imported) 55% 69% 62% 68% 71%Ship melting scrap 207$$$$$$$$$$$$$$$$$ 500$$$$$$$$$$$$$$$$$ 2,236$$$$$$$$$$$$$$ 1,361$$$$$$$$$$$$$$ 1,620$$$$$$$$$$$$$$Imported ferrous scrap 3,395$$$$$$$$$$$$$$ 3,590$$$$$$$$$$$$$$ 13,692$$$$$$$$$$$$ 5,848$$$$$$$$$$$$$$ 6,767$$$$$$$$$$$$$$Ship/(Ship+Imported) 6% 12% 14% 19% 19%Ship melting scrap 296$$$$$$$$$$$$$$$$$ 461$$$$$$$$$$$$$$$$$ 1,227$$$$$$$$$$$$$$ 1,124$$$$$$$$$$$$$$ 1,358$$$$$$$$$$$$$$Imported ferrous scrap 2,990$$$$$$$$$$$$$$ 4,579$$$$$$$$$$$$$$ 4,727$$$$$$$$$$$$$$ 3,606$$$$$$$$$$$$$$ 3,450$$$$$$$$$$$$$$Ship/(Ship+Imported) 9% 9% 21% 24% 28%Ship melting scrap 71$$$$$$$$$$$$$$$$$$$ 54$$$$$$$$$$$$$$$$$$$ 348$$$$$$$$$$$$$$$$$ 283$$$$$$$$$$$$$$$$$ 344$$$$$$$$$$$$$$$$$Imported ferrous scrap 337$$$$$$$$$$$$$$$$$ 764$$$$$$$$$$$$$$$$$ 1,806$$$$$$$$$$$$$$ 1,041$$$$$$$$$$$$$$ 926$$$$$$$$$$$$$$$$$Ship/(Ship+Imported) 17% 7% 16% 21% 27%Ship melting scrap 92$$$$$$$$$$$$$$$$$$$ 110$$$$$$$$$$$$$$$$$ 215$$$$$$$$$$$$$$$$$ 305$$$$$$$$$$$$$$$$$ 470$$$$$$$$$$$$$$$$$Imported ferrous scrap 13,500$$$$$$$$$$$$ 17,415$$$$$$$$$$$$ 15,666$$$$$$$$$$$$ 19,200$$$$$$$$$$$$ 21,453$$$$$$$$$$$$Ship/(Ship+Imported) 1% 1% 1% 2% 2%

Turkey

Table 6: Ship melting scrap versus imported ferrous scrap[3] (thousands of tonnes)

Bangladesh

China

India

Pakistan

steel prices are high, ship recycling becomes more profitable, bringing in more recycling capacity. Competition for tonnage amongst recyclers leads to a price balance that may be higher than the shipping markets would otherwise suggest, as is the case during the current period. Therefore, ship recycling is an informal industry that is wedged in between two powerful players, the steel making and the shipping industry. Seen in this light, ship recyclers face a tought fight and plenty of risk. Moving to the national level of the five main recycling countries, the remainder of this section draws some conclusions from the analyses of the previous sections. China is by far the largest steel producer in the world. In percentage terms it is also one of the smaller users of EAF production meaning that steel production in China is relatively expensive and polluting. This would suggest that there is much potential to a progressive switch towards the usage of scrap steel for steel making, with corresponding opportunities to China’s ship recycling industry, which industry already covers a significant part of the country’s needs for imported ferrous scrap. Turkey is the tenth largest steel producer and by far the largerst importer of scrap steel in the world. Most of Turkey’s steel production is already based on the EAF process. The ship recycling industry in Turkey covers one to two percent of the country’s needs for imported ferrous scrap. The above facts suggest that the country has the potential of becoming an even larger ship recycling centre. The importance of the production of inexpensive re-rolled steel for construction in Bangladesh, India and Pakistan has already been referred to. Furthermore, the entries in Table 6 show the importance of ship recycling in reducing imports of ferrous scrap for steel making in the three South Asian countries. This contribution is most pronounced for Bangladesh, which however is a country with very little crude steel production. To demonstrate the relative importance the ship recycling industry has to the economy of each of the five recycling countries a simple statistic is devised here, namely the ratio of all steel scrap produced by the country’s ship recyclers (i.e. 80% of LDT figures given in Figure 4, in thousand tonnes) to the country’s apparent steel use (expressed in crude steel equivalent thousand tonnes[3]). In order of reducing relative importance the data for 2011 are as follows: • Bangladesh 1,495 / 2,046 = 73% • Pakistan 688 / 2,531 = 27% • India 2,715 / 73,671 = 4% • Turkey 522 / 28,700 = 2% • China 1,800 / 649,850 = 0.3%

The analysis in this paper indicates that ship recycling gravitates to economies that have a direct need for importing ferrous scrap to make new steel or to re-roll steel. For at least the last fifteen years the same five countries dominated global ship recycling by processing almost all the world’s recycled tonnage. In the future, other countries could also become major ship recycling centres, if they need to import ferrous scrap and if their labour costs will not make ship steel scrap more expensive than imported ferrous scrap. Conversely, any plans to establish a major ship recycling industry in the places such as the European Union, or the USA, or Canada, would fail naturally because these economies have no need to import ferrous scrap and because their labour costs are absolutely high. In such mature

economies it would appear that ship recycling can only exist as a service for disposing smaller or government owned ships, or wrecks. SAFETY AND ENVIRONMENTAL PROTECTION IN SHIP RECYCLING Brief background to the development of the Hong Kong Convention The benefits that arise from recycling ships are many. When recycling a ship every part of its hull, machinery, equipment, fittings and even furniture is re-used. The industry creates economic development for local and regional communities: by large-scale direct employment, by the generation of associated industries, and by the large scale of trading in used equipment and machineries that takes place. There are further benefits to the economies of recycling countries from recycling steel, wood, machinery and equipment, that would otherwise have to be imported. While the principle of ship recycling is a sound one, the working practices and environmental standards in recycling yards often left much to be desired. For the last 20 or so years, the civil society therefore campaigned for a safer and a more environmentally friendly ship recycling industry. This pressure found outlets amongst politicians and Administrations, who looked for ways to regulate ship recycling with international common standards. The first attempt at addressing the problem internationally was to implement an off-the-shelf Convention, which was already in force. This was “The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal”. This Convention was developed in response to public outcry in the 1980s to combat the “toxic trade” following the discovery in Africa and other parts of the developing world of toxic wastes imported from abroad. The Convention was adopted in 1989, entered in force in 1992, and currently has 179 Parties. The Basel Convention, had not been developed for regulating end-of-life ships and it is therefore ignorant of the governance structures of international shipping. Quite early it became evident that there were practical and legal difficulties in enforcing the convention to ships. These difficulties were magnified in the European Union where the Convention is implemented together with an amendment (the Ban Amendment) forbidding the export of hazardous wastes (and ships) to non-OECD countries. The EC calculated that in 2009, 91% of European end-of-life ships had avoided or evaded the provisions of its Waste Shipment Regulation. Because of the practical and legal difficulties in enforcing the Basel Convention to the recycling of ships, the 7th Conference of the Parties to the Basel Convention, in October 2004, decided to invite IMO to consider establishing mandatory requirements that would ensure an equivalent level of control as that established under the Basel Convention (Decision VII/26). A year later, IMO’s Assembly 24 (December 2005) adopted resolution A.981(24), instructing the Marine Environment Protection Committee to develop a “new legally binding instrument on ship recycling”. IMO commenced work in March 2006 (MEPC 54) by developing text for a new international convention, on the basis of a first draft submitted by Norway. Probably in record time, three years and two months after the submission of the first draft, a diplomatic conference was convened in Hong Kong from 11 to 15 May 2009 to adopt the convention. The conference unanimously adopted the “Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships, 2009”, also known as “the Hong Kong Convention”.

It is not in the scope of this paper to describe the Hong Kong Convention. The interested reader is referred to another work [8] by the same author where he discusses the structure of the Hong Kong Convention, its underlying mechanisms, its scope of application, its requirements for ships in service, for ships preparing for recycling, for recycling States, and for ship recycling facilities. For the purpose of the present paper it should suffice to say that, through its practical and well thought out mechanisms, the Hong Kong Convention addresses the reduction of risks to human health, to safety, and to the environment. It does this through requirements on worker safety and training; requirements for the protection of human health and the environment; for emergency preparedness and response; and through systems for monitoring, reporting and record-keeping. The steps for accession to any international convention in most government systems are quite complex and time consuming. Furthermore, in the case of ship recycling there is a number of stakeholder Ministries involved and this prolongs the necessary consultation process. It is not surprising therefore that almost four years after its adoption, the Convention has yet to receive its first ratification. It is understood however that a number of key States – in terms of their ship recycling capacity or in terms of the tonnage registered under their flag – are busy working towards accession or ratification of the Hong Kong Convention. The interim period up to the entry into force of the Hong Kong Convention The current period, following from the adoption of the Convention and until its entry into force, is known as “the interim period”. During the interim period much progress has taken place already in terms of the acceptance of the Hong Kong Convention amongst the shipping and the ship recycling industries as the future single global standard for regulating the recycling of ships. The author has visited on numerous occasions ship recycling facilities in Bangladesh, China, India, and Turkey and has witnessed the progress that is taking place. The Chinese and the Turkish ship recycling industries are considered to be leaders in terms of safety and environmental standards. Most recycling facilities visited in both countries are already operating with good standards and do not need further expensive investment to satisfy the technical requirements of the Hong Kong Convention. In both countries the recyclers and their associations appear to have realised that they can comfortably meet the technical requirements of the Convention, even if the Convention entered into force today. India has also made considerable progress in the last five years. Following the judgement of India’s Supreme Court’s on the case of the “Blue Lady” in September 2007, the ship recycling industry had to satisfy new domestic legislation requiring recyclers to conform to most of the requirements of the then draft ship recycling convention on matters relating to safety, training, waste management and environmental protection. Consequently the Convention, as adopted, does not pose any additional major technical requirements to recycling facilities in India. As also witnessed in two visits to Alang, significant improvements have taken and are taking place across the industry. Furthermore, a number of Indian recyclers are investing in safety measures, environmental protection and social welfare that are above statutory requirements. The importance of the ship recycling industry to the economy of Bangladesh was highlighted in the first part of this paper. The country is poor and has many needs. Its recycling industry has attracted much criticism at home and from overseas because of its low standards, high rates of serious and fatal accidents, pollution,

and exploitation of workers. The influential environmental NGO, Bangladesh Environmental Lawyers’ Association (BELA), through a series of successful legal actions in the High Court created serious problems to the recycling industry, culminating with the effective banning by the Court of the import of ships for two lengthy periods. Eventually new regulations were established and the industry became operational again. Over the last five years many improvements have taken place across the industry and also in individual recycling facilities whose owners have realised that higher standards will progressively be demanded, not only by regulations but also by shipowners selling ships to them. A lot needs still to be done, especially in the areas of waste and hazardous waste management and also on training for safety and environmental prevention. Nevertheless, it will be a mistake not to recognise the significant changes that have taken place in recent years in Chittagong. The initiative of the European Union Having recognised that the European implementation of the Basel Convention is unable to regulate the recycling of ships, and wishing to introduce workable regulations during the “interim period”, in March 2012 the European Commission adopted its “Proposal for a Regulation of the European Parliament and Council on ship recycling”. The proposed Regulation is based on the Hong Kong Convention, while also containing certain additional requirements. When at a future date the Hong Kong Convention enters into force, the European Union should be able to easily align the European Regulation with the international Convention. According to the decision making process of the European Union, the proposed Regulation will have to be negotiated between the European Parliament and the Council of Europe over the coming months. If the negotiations are successful, the Regulation will be finalized, published, and entered into force. Notwithstanding certain valid criticisms on some important points of detail in the first draft, which are now being addressed by the European Council, the proposed Regulation is a positive step, because with it the European Commission recognizes the Hong Kong Convention as the practical and realizable standard for the recycling of European ships. It is also a bold step because with the proposed Regulation ships are removed from the scope of the unworkable European implementation of the Basel Convention. As part of the European process, the Parliament, here under the direction of the Green Party and the active lobbying of environmental NGOs, is proposing, as a means of stopping unacceptable recycling practices in South Asia, a set of amendments, including the banning of beaching for European flagged ships. It has been reported that some Members of the European Parliament are currently supporting the proposal for banning beaching as a means of generating ship recycling jobs in Europe! Beyond wishful thinking, the reality is that if such an amendment was to be accepted by the European Council and Commission, the three South Asian countries, which recycle two thirds of the world’s recycled gross tonnage and 70% of the world’s recycled lightweight, will certainly not stop beaching ships because of a European ban. Whilst it is quite likely that a ban may lead many European ships to evade the new European Regulation by flagging out as they approach the recycling age, the much more regrettable effect will be that Europe and its efforts towards clean and safe ship recycling will have no influence whatsoever in the countries where this influence is most needed. The only winners from a European banning of beaching will be those who make their living out of the continuing uncertainty that will prevail from the unclear, unenforceable and

confusing regulatory requirements. And the winners are certainly not going to be the, so called, exploited workers of South Asian ship recycling yards. Exploitation and unacceptable standards? NGO activists against the practice of beaching often target shipowners who sell ships for recycling to South Asian yards by naming them as irresponsible dumpers who hide behind flags of convenience, and who take advantage of low safety and environmental standards and who indirectly exploit poor unskilled migrant workers. The example is often given of Bangladesh where workers are said to being paid a measly three to four dollars for a very hard day’s work. Because politicians often repeat this rhetoric, it is worth examining it further: In a recycling yard in Chittagong unskilled workers are currently being paid between 8,000 and 10,000 Taka per month (26 working days). Skilled workers are paid between 15,000 and 20,000 Taka per month. Therefore, the unskilled worker receives around $4.40 per working day, while the skilled worker receives around $8.60 pwd. As people work very hard in Bangladesh, in 52 “6-working-day” weeks the unskilled worker earns $1,373 while the skilled worker earns $2,683. These isolated figures do not make any sense in the context of pay of workers in the developed world. Therefore in this paper we make a simplistic adjustment using the ratio of the Gross Domestic Product per capita of, for example, the UK, to that of Bangladesh. According to the most recent data available from the World Bank[7], in 2011 the Gross Domestic Product per capita in the United Kingdom was $39,038, while in Bangladesh was $743, giving a ratio of 52.5 Thus, the unskilled workers’ yearly pay of $1,373, in the context of Bangladesh’s society, is equivalent to $72,082, or £47,746 in the UK, while the skilled worker earns in a year the UK equivalent of around $140,858, or £93,301. These are sums that most skilled and unskilled workers in the UK would be too happy to earn, so the rhetoric on exploitation must be false. The analysis in this section also makes it clear that a ship recycling company that is operating in a mature economy, such as that of the UK, would not survive if it had to employ the same number of workers as employed in a yard in Bangladesh and if it had to pay them the equivalent to that paid to workers in Bangladesh. With reference to numbers of workers employed in yards, it is interesting to look at another allegation made by the anti-beaching NGO activists who often say “On the beaches of South Asia, poor and unskilled migrant workers are deployed by the thousands to break down the ships manually.” Having visited numerous ship recycling yards in Bangladesh over a period of five years, the author has witnessed a considerable shift towards mechanisation (especially for lifting), which no doubt has improved safety and productivity but which also has reduced drastically the number of people employed. To some extent similar considerations apply to our perception of safety, and environmental sustainability. Travellers to places like Bangladesh will initially be surprised, like I was, to see people travelling on busy roads sitting on flat roofs of moving buses. It must be obvious that metrics such as the “Cost to Avert one Fatality” cannot be the same in Bangladesh as for example in UK. And this leads me to question, not entirely seriously, whether a car manufacturer in, say, Japan should, on this basis, not export cars to Bangladesh because of its poorer road safety standards. On a more serious vein, however, a decision to not recycle ships

in a developing country on the basis of that country’s safety and environmental standards, risks losing sight of certain important and relevant considerations. As discussed earlier, in both India and Bangladesh, there are recycling yards that are already implementing gradual improvements to safety, to environmental protection, and to social welfare. The owners of these yards need – and deserve – to be supported by the custom of quality shipowners, so that their businesses can prosper and so that they can become examples to be imitated by the rest of the recycling industry in their country. If, on the other hand, these yards are not positively favoured by responsible shipowners, then how will safety, environmental and welfare improvements be fuelled in the countries that need them most? Regulators in the developed world as well as NGO activists still have the opportunity to help the process of change that has started taking place in the recycling industries in South Asia by supporting and, why not, demanding gradual, practical and sustainable improvements. The interim period up to the entry into force of the Hong Kong Convention is a period of opportunity for establishing and enforcing meaningful minimum global standards. If the European regulators prompted by the NGO lobbyists end up demanding improvements that cannot be met they will not only have wasted a rare opportunity to be a force for good, but in all likelihood they will have harmed the chances of the entry into force of the Hong Kong Convention. How to discriminate in an effective and responsible manner This paper has referred to yards that have already instigated improvements and that are serious about the safety of their workers and the protection of their environmental. Choosing such a yard after the entry into force of the Hong Kong Convention will simply be a matter of ensuring that the yard is authorised to recycle the ship in question. In the interim period, however, shipowners who are looking for a responsible recycling yard will need to find ways to differentiate between yards that are suitable and yards that are unacceptable. Such shipowners could consider selecting a ship recycling facility on the basis of most of the following criteria:

• The work force is trained for their respective jobs; • There are no children employed in shipbreaking activities; • Personal Protection Equipment is provided and used by the workforce; • Safe-for-entry and safe-for-hot work conditions are maintained; • The workforce is provided with adequate sanitary facilities; • Winches, cranes and lifting equipment are adequate and regularly load

tested; • There are provisions for the safe removal and storage of hazardous

materials; • There are procedures for containing spillages and the avoidance of pollution; • The disposal of hazardous materials to authorized sites is monitored; • The record of any accidents and incidents over the past five years is

available; • An emergency preparedness and response plan has been established and

maintained; and • The recycling facility is ISO certificated (9000; 14000; 18000; 30000) by a

reputable international certifying company. The author of the paper recently started working with GMS, who is a Cash Buyer that has built unparalleled expertise and knowledge of the ship recycling industry

over the years. At GMS the author is responsible for developing initiatives that will encourage the contracting of ships for responsible (“green”) recycling, whether in South Asia, or anywhere else in the world, in line with the technical standards defined in the Hong Kong Convention. Those who care about improved standards ought to be heartened to now see the first Cash Buyer investing in ship recycling plans and programmes that are tailored to the needs of shipowners who want to ensure that their vessels are recycled in responsible manner. REFERENCES [1] World Steel Recycling in Figures 2007-2011, Bureau of International Recycling,

Ferrous Division http://www.bir.org/assets/Documents/publications/brochures/WorldSteelinFiguresIIIFINLoRes.pdf

[2] Steel Scrap Markets in Europe and the USA, by Patrik Soderholm and Thomas

Ejdemo, Minerals & Energy, 2:57-73, 2008 [3] Steel Statistical Yearbook 2012, Economic Committee, Worldsteel Association [4] World Steel in Figures 2012, Worldsteel Association [5] Industrial Capabilities of North America - A report on ‘green’ ship recycling

capacity in the United States, Canada and Mexico, Basel Action Network, 2012 [6] Calculation of recycling capacity for meeting the entry into force conditions of

the Hong Kong Convention, International Maritime Organization, MEPC 64/INF.2, 2012.

[7] The World Bank, GDP per capita, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD [8] The Emergence of an International Regulatory Regime for the Ship Recycling

Industry, Dr N. Mikelis, Lloyd’s Maritime Academy, Sale & Purchase Conference London, September 2012

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