The Baltic Exchange has issued a Briefing to provide an overview of the latest developments in the international ship recycling regimes
For as long as ships have carried goods and passengers between ports, and facilitated trade and growth there has been a market for the materials of the ship construction once they reach the end of their economic life. From early beginnings when a ship’s timbers may become the frame of a house or in the case of the British Artic Exploration ship, Resolute, a desk still standing to this day in the Oval Office; ships at the end of their efficient working lives come to be divided up into their component parts, recycled and reused in numerous applications.
As ships have evolved in scale, specification and complication both their recycled value and the health and environmental hazards associated with their recycling process have grown to the extent that a global regulatory framework is necessary to ensure safe and environmentally sound recycling. Such is a modern ship’s construction that at least 95% of its weight can be recycled and over the last 15 years, five countries (Bangladesh, China, India, Pakistan and Turkey) have dominated this market, consistently recycling 95-98% of global tonnage. Turkey, the smallest of these top recyclers with around 4% of global capacity still recycles more tonnage than the combined capacity of the rest of the world. Tidal beaching, the most rudimentary and controversial of recycling techniques is practised across South Asia and accounted for 74% by Gross Tonnage (GT) of global ship recycling in 2014, some 641 ships.
Besides large shipowners, the recycling market is not well known or understood and this leads most owners to utilise an intermediary cash buyer to facilitate the recycling of their vessel at the end of its commercial life. Cash buyers specialise in the recycling market and target the best price for a vessel placed in recycling yards. Despite the corporate social responsibility of shipowners to ensure they are recycled in a sustainable way, the price differential between beaching and greener recycling methods can be significant. Traditionally, prices at South Asian facilities are 40-60% higher than in Turkey and China where a more mechanised contained approach is taken, necessitating a careful decision by the shipowner.
Such a comprehensive regulatory regime was introduced in 2009 with the signing of the IMO Hong Kong International Convention on the Safe and Environmentally Sound Recycling of Ships (HKC). The Convention is not yet in force as only four states representing 1.5% of global gross tonnage have so far ratified it, thus falling some way short of the necessary ratification by fifteen states representing 40% of global gross tonnage. The HKC “cradle to grave” approach to ship recycling covers the design, construction, operation and preparation of ships for recycling.
It also provides rules for the operation of ship recycling facilities, stipulating the requirement of a ship recycling facility plan and stresses the improvement of environmental credentials and employee working conditions at the facilities. Crucial to the HKC is the requirement of a certified Inventory of Hazardous Materials (IHM) for individual vessels. The document, which accompanies a ship throughout its trading life, indicates the quantity and location of the hazardous materials in its structure that will be encountered upon during recycling.
The delay in ratification of the HKC by states led to the EU’s frustration and in an effort to encourage faster adoption the European Parliament adopted the European Union Ship Recycling Regulation 1257/2013 (EUSRR) in December 2013. Viewed by the Commission as an interim measure to address the global issue of ship recycling, its requirements will become applicable between the end of 2015 and 2018.
The EUSSR broadly reflects the same technical standards as the HKC however departs from the Convention in several key areas. The EUSSR stipulates a ban of the beaching method of ship recycling, requires all ships calling at EU ports to carry an IHM containing a more stringent list of hazardous materials than that in the HKC annex, and lastly requires all shipowners of EU flagged vessels, to only use ship recycling facilities that are on the approved EU list.
The environmental controls and worker conditions currently present in many ship recycling facilities across South Asia are unacceptable and large improvements are required for them to reach HKC or EUSSR compliant standard. Beaching delivers a major source of employment and provides for many people living in poverty, the practice gravitates toward economies with a demand for importing ferrous scrap to make new steel or for re-rolling. Indeed the lower levels of infrastructure and energy required to re-forge and re-roll ship steel means it is highly sought after and commands a premium when compared to normal scrap.
It is estimated that scrap steel provided by the ship recycling industry respectively provided Bangladesh and Pakistan with 73% and 27% of their domestic apparent steel use in 2011. Consideration must therefore be given to how the blanket ban of beaching within the EUSSR may reverse the ongoing environmental and working condition improvements in progress across South Asia and impair supply to their domestic steel industries.
However, if the Commission fails to approve sufficient capacity at ship recycling facilities, 2.5 million LDT, the EUSRR could be undermined. A further difficulty arises in that whilst the capacity threshold may be reached, doubts exist as to whether the facilities will be able to accommodate the larger vessels trading today since the majority of recycling yards able to do so are outside the EU and require application for inclusion on the European list. Furthermore, a lack of approved recycling capacity may artificially extend the economic lifespan of ships, leading to oversupply, falling competitiveness and less energy-efficient vessels within the European fleet. The inability of European owners to realise the same price at disposal as their non-EU competitors may place them at a competitive disadvantage and encourage the practice of flagging out at the end of the vessel’s life to circumvent the regulation.
Conscious of the incentive to flag out before the ship needs to be scrapped; Article 29 of EUSRR obliges the Commission to commission a report on “the feasibility of a financial instrument that would facilitate safe and sound ship recycling” and introduce legislation to that effect if appropriate by the end of 2016. Recital 3a of the SSR provides further explanation as to its objective, which having regard to the “polluter pays” principle “…should assess the feasibility of establishing a financial mechanism applicable to all ships calling at a port or anchorage of a Member State, irrespective of the flag they are flying, to generate resources that would facilitate the environmentally sound recycling and treatment of ships without creating an incentive to out-flag”.
A pre-requisite of any such instrument must be that it does not distort competition by unilaterally penalising or favouring any particular interested group, whether that be weakening the competitiveness of European shipowners by only applying to EU flagged vessels, or subsidising cost-inefficient EU ship recycling facilities. The ongoing report is examining six instruments both financial and non-financial to incentivise green ship recycling. Three of the financial instruments suggested (a restricted shipping account, ship life insurance or a ship recycling guarantee) result in EU shipowners bearing costs that are not borne by non-EU shipowners and therefore continue to serve as an incentive to flag
out The final financial mechanism, a ship recycling fund is intrinsically different as the costs are not linked to a specific capital asset, in this case the vessel but rather a collective central fund. This meets the objective as set out in recital 3a and it is worth examining further.
The ship recycling fund would function as a levy or fee applied to all shipowners calling into EU Ports which would feed into a general fund centrally managed for sustainable ship recycling. A tariff structure could apply to take into account the type of vessel, its tonnage, frequencies of calls but would likely be independent of freight or charter rates. Identifying the beneficiaries of the fund and distributing the income poses significant challenges and the fund would require a mechanism to prevent the market distortions whereby the burden is unevenly shared between owners of older ships who pay only contribute for a short period before benefitting and therefore gain more from the fund than those using newer ships.
Consideration must be given to the time period required in order to build sufficient reserves, as whilst the fund will immediately begin to raise levies it is likely that a minimum sustainable level must be reach prior to the fund being able to subsidise EUSSR approved facilities. The lack of direct link between the payments made and release of reserves means the its perception as a subsidy may cause issue and it would need to be assessed against state aid guidelines and any mechanism that levies all vessels so as to provide funding and support for sustainable recycling in predominantly EU and OECD countries may be construed as anti-competitive and open to challenge. Furthermore there could be potential concern over the cargo distribution effect, would ports on the EU periphery would see vessel calls decline in favour of nearby ports where the levy would not apply.
What is clearly evident is that the introduction of any such measure is fraught with difficulty and will take a considerable amount of time to be agreed upon and legislated. In the meantime, if the collective and timely ratification of enough states enables the HKC to come into force, if the EU’s approval of eligibility of recycling facilities avoids being overly restrictive and onerous and if effort is made through structural programmes to improve recycling conditions so that sufficient approved recycling facilities exist, then the requirement for a financial instrument disintegrates and the market is left with a functioning global regulatory regime and no choice but to recycle in certified facilitates.
Source: Baltic Briefing
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