July 31, 2018 I Ratings

Ship Breaking Industry-

Overview
Challenges Ahead
Ship breaking industry or Ship recycling industry has seen a major
shift to Asian counterparts over the period owing to the
Contact:
Yogesh Shah environment concerns. On one hand, ship breaking is a green
Director – Corporate Ratings
[email protected] process wherein a ship at end of its life cycle is being dismantled and
91-79- 4026 5603
each part is sent further for reuse, but on the other hand, the

Akhil Goyal
complex process of dismantling involves issues like labour safety and
Senior Manager health and further it poses challenges on environment as well, which
[email protected]
91-79-4026 5621 is a matter for criticism. However, the ship breaking activity is being
recognized as major source of steel for re-rolling steel plants.
Digant Rupalkar
Analyst Ship ageing and factors determining ship recycling
[email protected]
91-79-4026 5644 Ships can be classified in six types and their ageing is tabulated in
table 1 as follows:
Anam Shah
Analyst
Table 1: Different Types of ships and their Lifespan
[email protected] Tonnage Range Approximate
Types
91-79-4026 5622 (‘000 MT) Lifespan
General Cargo 5-25 25-30 years
Bulk Carriers 15-40 25-30 years
Mradul Mishra (Media Contact) Oil Tankers 10-55 27-32 years
[email protected]
91-022-6754 3515 Passenger Ship 5.2-22.5 25-30 years
Drill Ships - 10-25 years
War Ships 1.5-35 30-35 years

Figure 1: Age Distribution of world fleet, (beginning of 2017)

Disclaimer: This report is prepared by CARE Ratings Ltd.

CARE Ratings has taken utmost care to ensure accuracy and
objectivity while developing this report based on
information available in public domain. However, neither
the accuracy nor completeness of information contained in
this report is guaranteed. CARE Ratings is not responsible
for any errors or omissions in analysis/inferences/views or
for results obtained from the use of information contained
in this report and especially states that CARE Ratings has no
financial liability whatsoever to the user of this report

Source: UNCTAD/RMT/2017- UN Review on Marine Transport

 Ratings I Ship Recycling Industry-Challenges Ahead

Table 2: Long-term trends in average age, by vessel type based on dwt

Year\Type of vessel Tankers Bulk carriers General cargo Containerships Other All Ships
1987 12.10 10.70 13.70 NA NA 11.70
1997 14.90 14.60 17.30 12.00 15.30 14.90
2007 10.00 12.90 17.40 9.10 15.10 12.00
2017 9.90 7.95 18.29 8.72 15.58 9.90
Source: UNCTAD/RMT/2007 & UNCTAD/RMT/2017- UN Review on Marine Transport

The decision to send the ship for the purpose of recycling depends on the life of the ship and how quickly does the ship
become obsolete. The ship can be considered to have become obsolete on the basis of following 3 parameters:
 Indicates the physical condition of the ship and deterioration with time.
Physical
 Spend an increased amount on repairs and maintenance.
Obsolescence
 Recycling of ship becomes a cheaper option and results in positive cash flows.
Technical  Being physically sound, but no longer profitable to remain in service due to increased
Obsolescence competitiveness by a more efficient ship.
 Scrapping of ships due to regulatory requirements.
Regulatory  Issues such as port state controls, vetting inspections and statutory surveys and other
Obsolescence regulatory requirements lead to believe that scrapping the ship is more convenient than
maintaining the ship and adhering to regulatory requirements.

Methods of Ship Recycling/Ship Breaking

There are 4 methods used globally for the purpose of recycling of ships.
Name Beaching Slipway Alongside/Buoy Method Drydock
Similar to beaching
Ship is dismantled at Used to dismantle ships which are
method but without
intertidal zone of the afloat and cut systematically using Ships are dismantled
the help of tides. The
beach. With the help of cranes and automated cutting gear in at a drydock, floating
ships are beached
high tidal waves ships are vertical direction. Starting from top of dock, or a slipway that
Process against the shore and
gradually pulled higher navigation deck and subsequently has a lock gate and an
then pulled with the
on to the beach with the reaching double bottom. The cutting impermeable floor
use of a concrete
help of cranes and heavy peripheries do not come in contact structure.
slipway about 400-700
steel wires. with sea water.
feet long.
Chittagong in Turkey & few locations China, United States & Belgium. UK
Bangladesh, Alang in in UK and US.
Place
India and Gadani in
Pakistan.
Method is the safest
and cleanest way of
The dismantling of ships recycling a ship
This method prevents
on tidal mudflats leads to because chances of
accidental oil spillages Due to no tidal dispersal, local impact
Issues/ washing away of oil spills polluting surrounding
preventing such of pollution is likely to increase.
benefit and other hazardous waters by accident
materials to get mixed
materials with the tide are virtually nil as
with sea water.
into the water. everything is
contained within the
dock.
Source: CARE Research

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 Ratings I Ship Recycling Industry-Challenges Ahead

Process of ship procurement for recycling

A ship owner can choose either of two options: either sell the ship directly to a ship recycling yard or sell it through a cash
buyer. Most ship owners prefer to choose the latter strategy because cash buyers pay a lump sum to the ship owners in
cash in advance, and charge approximately 3% commission to close the deal. The role of cash buyers is negotiation and
bearing financial risk since they sign a contract and pay the owner till they get paid for delivering a ship to a recycling
yard. The price offered to a ship owner is in terms of USD per light displacement tonnes (LDT).1
Global trend of ship recycling
Until 20th century, ship recycling used to be carried out in industrialized ports including in USA and UK. Thereafter, the
major centers of the Ship
Table 3: Major Location Cluster
Breaking and Recycling Sr. No. Country Location Yard
Industry (SBRI) first moved 1 India Alang in state of Gujarat*.
2 Pakistan Near Karachi at Gadani beach situated Balochistan.
from Europe and North 3 Bangladesh Sitakunda coastal strip situated north port of Chittagong.
America to East Asia and, 4 Turkey Aliaga, a town situated on Aegean Sea, north of Izmir port.
5 China Yard located along the Yangtze river, close to Shanghai and yard
since the 1980s, to South located along the Pearl river in Guangdong province. Some of
Asia. At present, global ship yards also located at Tianjin, North of Shanghai.
*Alang contributes 98% total ship-breaking in India and other locations include Bypore, Azchical
breaking industry is
concentrated mainly in five countries, namely India, Pakistan, Bangladesh, China and Turkey. The level of activities in
these countries varies from year-to-year and depends on availability of ships for scrapping. The ship recycling in five major
countries are clustered in particular region.
Figure 2: Trend of Share in ships broken/recycled (no. of ships) in major countries

Source: Annual report of NGO Shipbreaking platform, Note: Total 835 ships were recycled in 2017
As Indicated by the figure 2 above, India has remained a major contributor to the ship breaking industry over the past 6
years albeit the activities has shown decreasing trend in India due to competition from Bangladesh and Pakistan offering
better prices. India had a market share of 38% in 2012 which declined to 29% in 2017, simultaneously market shares of

1
LDT – light displacement tonnage; a measure of ship’s weight when it is empty

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 Ratings I Ship Recycling Industry-Challenges Ahead

Bangladesh and Pakistan have improved from 18% and 9% in 2012 to 24% and 13% in 2017 respectively. Decline in
share of China is primarily on account of its protective policy to reduce pollution.
A small number of ship breaking companies are also scattered in the United Kingdom, United States, Canada, and
European countries, such as Spain, Belgium, Netherlands, etc. specializing in breaking warships, fishing vessels and other
high value vessels but do not pose any competition to Asian ship breakers due to high labour costs, lack of a ready market
for recycled material and stringent environmental regulations. The size of a recycling yard is generally determined by its
annual dismantling capacity, which varies from one country to another. For example, yard sizes in the Indian subcontinent
are in the range of 20,000–150,000 LDT per year. The size of the yards in Turkey is in the range of 50,000–100,000 LDT per
year whereas, in China, yard sizes vary from 30,000 LDT to 1.2 million LDT.
Indian Ship-recycling Industry
In India, full-fledged ship breaking practices started around 1980s in Mumbai and Kolkata and later Alang in Bhavnagar
district, Gujarat was developed for ship breaking owing to its various advantages listed below and is considered the
world’s largest ship breaking facility. Alang became centre of ship breaking activities in the world post 1991-92. From
1991-92 to 2016-17, Alang has been a consistent player in ship breaking, demolishing close to 6899 ships. It accounts for
98% of total ships recycled in India.
1. The site falls in the high tide zone where the highest tide reaches up to 10 to 11 meters. This is considered to be most
favorable for beaching purpose.
2. This site is located in the Gulf of Khambhat and whose harbors are protected areas during rainy season which allows
ship breaking activity.
3. The coast of Alang is sloping and has a long dry area which facilities reaching up vessels.
4. The seabed at Alang dries up very quickly even during monsoon, thus facilitating the handling as all kinds of material
and equipment.
5. The area along the coast as Alang is free from other competitive users, like merchant shipping, fishing and salt work.
Figure 3: Nos. of Ships broken at Alang

Source: Gujarat Maritime Board, CARE Research

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 Ratings I Ship Recycling Industry-Challenges Ahead

Recyclable material classification and its proportion in various types of ships

The revenue generated by a ship recycling yard depends on what types of materials can be extracted from a ship and
out of those extracted, what and how much can be classified and sold as recyclable material and reusable material. Such
classification mainly depends on
Table 4: Inventory of Recyclables according to type of ships
applicable local and international General Bulk Oil
Material Recovered
regulations and local market for Cargo Carriers Tankers
Re-Rollable Ferrous Sheets 56-70% 61-75% 72-81%
reusable goods and scrap metals, Meltable Ferrous Scrap 10% 8-10% 5-7%
such as steel, nonferrous metals, Cast Iron Scrap 1.5-5% 1.5-2.5% 1.5-3%
Non-ferrous Metals 0.5-1% 0.50% 0.5-2%
etc. The markets for reusable goods Weight Loss 9-15% 10-16% 10-12%
and scrap products differ from one Machinery 4-8% 1-6% 0.5-2%
Wooden Furniture and Fittings
country to another. In the advanced 5% 1-5% 1.5-2%
/ Fixtures
European countries, steel scrap is
generally completely melted down to make new steel products whereas in the East and Indian subcontinent, steel scrap
is sometimes simply heated and rerolled in reinforcing rods for use in the construction industry.
Factors Affecting Indian Ship-recycling Industry:
1. Movement in Freight Prices: Majorly, the current earnings and future expectations drive the ship recycling
industry. The movement in the freight prices is indicated by the Baltic Dry Index (BDI). BDI is basically shipping and a
trade index created by London Based Baltic Index. Other index include Baltic Dirty Tanker Index and Baltic Clean
tanker index which is linked to freight prices of Oil tankers. These indexes specify the cost of transportation to ship
owners. The cyclicality in the ship breaking industry is inherent with its negative correlation with the Baltic indexes.
Better availability of ships are expected at the time of recession when the freight rates are lower as ship owners find
it economical to send the ship for the purpose of recycling rather than using the ship further. Ship breaking at Alang
had declined significantly in FY14 (refers to the period April 01 to March 31) over FY13 impacted by the availability of
ship with rise in Baltic Indexes.
Figure 4: Baltic Dry Index, Dirty Tanker Index and Clean Tanker Index

Source: Lloyd's List

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 Ratings I Ship Recycling Industry-Challenges Ahead

2. Scrap Prices vis-à-vis steel price movement: Profitability of ship breakers is susceptible to steel scrap prices
which are linked to global steel prices while post ship purchase ship recycler/breaker have to bear the price risk. The
scrap prices hold less importance for ship owner when it comes to deciding whether a ship should be scrapped or
not. The ship breaking industry contribute small proportion to steel industry viz. around 1.5% of the steel
requirement and so the scrap prices are affected by the market scrap steel price rather than demand and supply of
ship. The volatility in steel prices driven by demand and supply conditions in the global as well as local markets
exposes ship-recycling companies to any adverse price movement on the uncut ship inventory as well as unsold
inventory of steel scrap held by them. In past steel scrap prices had remained volatile in nature. The trend of ship
procurement price vis-à-vis steel scrap prices is given below:
Figure 5: Steel Scrap prices and Procurement Price trend for the past 4 years (in dollars/LDT)

Source: Athenian shipbrokers S.A., CMIE; Note: Steel scrap prices are taken for Bhavnagar Heavy Melting scrap prices and are
converted into USD based on monthly average of exchange rate.

For ship breakers the procurement prices should be compared with steel scrap prices with lag of 1-2 months which
is the normal time taken for processing and approval. Furthermore, the price trend reflects the challenging scenario
ahead with decline in profitability with increasing competition.
3. Competition from the global peers: Indian
ship-recycling yard face intense competition from Table 5: Indicative Demolition Prices
the neighbor countries like Bangladesh and Countries Gen. Cargo Tanker
India USD 430/Lt Ldt USD 435/Lt Ldt
Pakistan due to availability of low wage labour, Bangladesh USD 425/Lt Ldt USD 440/Lt Ldt
lax occupational health and environment related Pakistan USD 415/Lt Ldt USD 430/Lt Ldt
China USD 260/Lt Ldt USD 280/Lt Ldt
regulations, and partial enforcement. Turkey USD 280/Lt Ldt USD 290/Lt Ldt
th th
Furthermore, the currency also plays a key role in Source: Athenian Shipbrokers S.A. Week 24 2018 (11 -15 June)

determining competitiveness of Indian ship

breakers.

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 Ratings I Ship Recycling Industry-Challenges Ahead

4. Forex Risk and high hedging cost: Majority of the ship breakers purchase ships by way of Letter of Credit (LC) and
tenure for the same depends upon the size of the ships and its recycling period which normally ranges from
anywhere between 90-270 days. Since, the transaction is denominated in foreign currency at time of purchase of ship
and there is time lag in actual sales after ship breaking leading to exposure of their profitability to forex risk. Banks
normally keep 10% as FD margin and require ship breakers to keep their sales receipts after meeting expenses as FD
till full repayment. Furthermore, due to high hedging cost compared to low profitability, ship breakers are often
resistant to hedge its cash flow.

Figure 6: USD to INR exchange rate trend

Source: Federal Reserve Economic Data

5. Regulatory Risk: The ship-breaking industry is highly regulated with strict working and safety standards to be
maintained by the ship-breakers for their labourers and environmental compliance. Furthermore, the industry is
prone to risks related to pollution as it involves dismantling of ships which contain various hazardous substances like
lead, asbestos, acids, hazardous paints, etc. that have to be properly disposed-off as per the regulatory guidelines.
The key areas include ground pollution, water pollution and health and safety of workforce. Over the period
importance of green ship
recycling procedures had Year of Country of Certified Plot at
Certifications
Establishment Origination Alang, Gujarat
increased significantly even for Class NK (Nippon Kaiji
1899 Japan 18*
seller there are pressures for Kyokai)
Class RINA (Registro
selling ships to the green certified Italiano Navale) 1861 Italy 45

yards. There are various As per HKC- 5

Class IR 1975 India EU certification- 4
certification agencies which IR Class ISO -22
certify the recycling facilities *May, 2018

compliance to the Hong Kong International Convention guidelines.

The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships adopted by the
International Maritime Organization (IMO) in May 2009 and the European Regulation No. 1257 adopted by European

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 Ratings I Ship Recycling Industry-Challenges Ahead

Parliament and Council in November 2013, provide a legally binding instrument which ensures that the process of
ship recycling does not pose risks to human health, safety and to the environment. The table elaborates on the major
certification agencies with prominence in Indian ship breaking industry.

Normally, above certifications are issued to ship-recycling facilities that they are in compliance with Hong Kong
convention, after confirming the ship recycling facility plan meet the requirement of the convention. However, above
certification agency have its guideline regarding the waste disposal, effluent treatment, safety of workers and
maintenance of records.

Rating dispersion of Care Rated entities in Ship Recycling Industry

Of the ship breakers rated by CARE Ratings Limited, 73% are in below investment grade category (‘BB’ and
below category) due to several factors such as
modest and fluctuating profitability with
moderately leveraged capital structure and
debt coverage indicators, Exposure to volatile
raw material prices and regulatory and
environmental risk. Credit profile of CARE rated
entities mainly remained stable during FY17
with marginal improvement in coverage
indicators.

Recent Developments
1. China to Stop Recycling Foreign-Flagged Ships: China has announced a ban on importing foreign-flagged vessels
for recycling, applicable from January 1, 2019 as it toughens its stance on waste processing industries. This is
expected to benefit other ship recycling countries.

2. India prepares to ratify and implement the Hong Kong Convention: The main international laws include EU
regulations and Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships. The
Hong Kong convention was adopted by International Maritime Organization in 2009. Furthermore, In August 2014,
the ship-breaking industry, so far under the Steel Ministry, was brought under control of the Shipping Ministry. This
move was to attract more ships to Indian yards, including the world’s largest — Alang in Gujarat — and get
marketed well at international shipping forums. In furtherance to this, Government of India has now decided to
ratify and implement the Hong Kong Convention. Towards that, the ministry has drafted legislation to make the ship
recycling industry safe for its workers and the environment and to implement the Hong Kong Convention (HKC).

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 Ratings I Ship Recycling Industry-Challenges Ahead

3. Soft Loan Upgradation of Alang-Sosiya ship recycling shipyards: GoI signed $76 million loan deal with Japan
International Cooperation Agency (JICA) for starting upgradation project related to environment management plan
at Alang-Sosiya ship recycling shipyards. The project will be executed by Gujarat Maritime Board (GMB) and is likely
to be completed by 2022. The total cost of project is $111 million out of which $76 million will be provided by JICA
as soft loan. Out of remaining amount, $25 million will be borne by Gujarat Government as taxes and fees and
balance $10 million will be shared by Ministry of Shipping. The components of project are outlined below:
a. Upgrading 70 yards, providing impervious floors to prevent pollutants in subsoil. Improvement of the existing
environmental facility (Effluent Treatment Plant (ETP).
b. Introduction of mobile decontamination units (Pollution response equipment).
c. Introduction of large mobile cranes and beach cleaning wheel loaders and tank cleaning barge.
As per GMB Port policy discussion paper implementing the above plan, Alang would be able to get more vessels
from OECD and western world as a result of which Alang would contribute to 51% of total global ship recycling
volume from current share of 30%. This could translate into generation of additional revenue to the tune of US$
100 million over 20 years project cycle from case business services.
Prospects
Though, the size of the ship breaking industry is relatively small but its strong linkage with independent variables viz.
environment regulations, freight prices and steel scrap prices sets it apart from other industries. Overall improvement in
global trade and continued reliance on crude oil is expected to keep freight prices stable in medium-term while
improvement in infrastructure activity in India and upward trend in steel prices is expected to be positive for Indian ship
breaking industry. However, with increasing compliances and stringent regulations vis-à-vis global peers are expected to
adversely affect the profit margins posing a challenge to the Indian ship breaking industry.
European Regulation on Ship Recycling (EUSRR) is scheduled to enter into effect on December 31, 2018 which means
that large commercial seagoing vessels flying the flag of an EU member state will only be allowed to recycle in a ship
recycling facility included in "European List of ship recycling facilities” which does not include any ship recycling facility in
India, Bangladesh and Pakistan as per the list of May, 2018. If same is not expanded, it could have led to shortage of
recycling capacity for ship-owners with EU-flagged vessels to dispose the end-of-life tonnage. India’s steps for
ratification and implementation of Hong Kong Convention and up gradation of Alang yard with cooperation of JICA is
expected benefit in long run by adopting green recycling norms while addressing health and environmental concerns.

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