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Shipbreaking in OECD 2 Shipbreaking industry
2.1 History and geographyOver the past the demolition of European vessels has moved from locally in the European region, notably Spain and Italy, and Japan during the 60 and 70’s to Asian countries such as Taiwan, China and Korea in the 80’s. In these days shipbreaking took place along piers in connection with ship yard activities. During the 1980's the method of beaching, which was initiated by an accidental beaching became the most frequent method since it allows the demand for infrastructure (piers, sufficient depth of the harbour, cranes etc.) to be replaced by an intertidal mud flat and a huge labour force. It therefore takes place in countries with cheap labour: Bangladesh, Pakistan and India. China is also active in the demolition market with pier breaking. A number of countries are on and off the market: Thailand, the Philippines, Indonesia and Mexico. Finally, demolition does occur in high cost OECD countries such as the EU countries and North America. Particularly, obsolete fishing ships and navy vessels are demolished, but not larger vessels. The infrastructure needed for ship dismantling also of large vessels in terms of shipyards, steel mills etc. is to some extent still available. However, the economics of shipbreaking are not in favour of OECD countries: it is not only the higher labour costs and the cost of protecting human and environmental health, but also that the market demand for recycled steel and other reusable items from ships is less in the OECD compared to e.g. the Indian subcontinent. The prices obtained in third world countries are consequently better on per tonnes of steel basis. 2.2 Industry profile 1994-2002The amount of shipbreaking taking place within OECD countries is very limited. Quite a number of countries have done some shipbreaking in the last 8 years (Clarkson's 2002) but only Turkey, Spain and Mexico have more than 10 records of shipbreaking in that period. Yet they cover only 1.5% of the tonnage. Other OECD countries have 1-2 records, see Table overleaf. Table 2.1The global number of vessels by break up location and their tonnage, 1994-2002
Source: Clarkson's demolition database, 2002. The three OECD countries with the highest number of demolitions are shown in bold. The Japanese record has been proven to be erroneous. The statistics of 1999 show that the European vessels are demolished mainly on the Indian subcontinent, with the larger vessels sent to Bangladesh and Pakistan. Approx. 25% of the vessels were demolished in OECD countries representing only 7% of the GT. Again, it is Turkey, Mexico and Spain that account for the majority of the OECD demolition. Table 2.2
2.3 The price of a shipThis section includes information about which factors that are important in determining the price of scrapped ships.
The key driver for the price The key factor for the price will be the price of scrapped steel. The global decommissioning volume is overall a function of the steel price and the freight rates. High steel prices and low freight rates will lead to a higher scrapping volume and vice versa. The relationship between the number of recycled ships and the price of the steel is clearly seen in Figure below, emphasising this very important factor in determining the number of vessels scrapped.
Figure 1. The prices offered by the various shipbreaking companies differ quite remarkably across regions of the world and vary considerably over time. This is due to differences in the costs as well as differences in demand and supply of scrapped steel in that particular region. Obviously, international regulations such as the IMO Regulation 13G requiring phase out of single-hulled tankers and other international agreements will also influence the supply. How much each of these factors contribute to the specific market conditions of countries and regions is not a matter for this report, but a number of issues that influences the ship scrap value in a particular region can be listed, e.g.:
For some of the countries engaged in scrapping the raw materials supplied to the steel-industry for both re-rolling and re-melting can be a considerable part of the steel used in the country. The shipbreaking is in these countries often viewed upon as a cost-effective way of steel import in addition to the job creation effect. The breaking processes also supply second hand material and equipment for re-use locally and for export. Price unit The price unit of scrapped metal is US dollars per LDT. LDT is an abbreviation of Light Displacement Tonnes, which is a measure of the weight of the ship when it does not contain oil, water, fuel, cargo, crew etc. The part of a ship that is steel varies considerable with the type of the ship and the size, but in CEC (2001) as standard size relation is given:
Lightship = 75% A + 12.5% B + 12.5% C For a range of cargo ships up to 400,000 DWT the correlation is shown in the Figure below. Cruise ships, Ro-Ro ferries, fishing vessels have somewhat different LDT compared to their DWT (from CEC 2000).
Figure 2. The relationships between DWT scrapped and the representing GT have been estimated for the two size categories respectively, and have been found to be (CEC 2001):
Size classes Generally, tankers were classified in 1974 for freight purposes as follows:
In this report "large" will be taken as a tanker >50,000 DWT or corresponding dimension of other types of vessel. Other vessels' carrying capacity may be measured in various units: Bulk carriers also in DWT, container carriers in TEU, cruise ships in 1000 passengers and vessels in general in DWT or GT. The dimensions in terms of depth and length relative to the size unit differ somewhat between types, and also the steel weight per unit is different between types. Type of ship The ship type is important in determining the price offered by the ship breaker. Large ships with easily accessible surfaces, such as tankers, are easier to cut in pieces and are therefore more valuable to the shipbreaking companies. More compact vessels with different materials mixed and smaller free surfaces claim lower prices/unit. The value of per ton ship metal can vary up to around 40%, cf. Table 2.3. To a large extent this reflects the ratio of steel weight/LDT with some allowance for the demolition difficulties of the type of vessel. Table 2.3
Source: Clarkson's demolition database, 2002. Tankers are set to index 100. L.P.G. is an abbreviation for a special type of tanker carrying Liquid Petroleum Gas. Included in the sample used to calculate the numbers in Table 2.3 are only ships from India. This is because the prices differs widely across regions (see below) and because there is a tendency that relatively smaller ships have a higher probability of being sent to an OECD country than do larger ships. It should be mentioned that e.g. in Turkey, the scrap metal price varies only around 10% across types of ships presumably because fewer types and generally smaller ships from a shorter time period are included in the data base. Other factors The main factor determining the price is simply the steel weight. Other factors, such as engines, second hand items, the amount of more valuable metals such as copper and aluminium etc. are not very important for the value of the ship. A "guestimate" is that non-steel accessories such as engine, pipes etc. account for 3-4% of the total value of scrapped ships (Personal communication, Clarkson). The possible content of oil and other valuable consumables also plays only a minor part in the price setting. However, it is important whether the ship can go by its own engine or must be towed, and whether it can carry cargo on its way to the demolition place etc. If self-propelled the length of the transport route is less important. Towing is expensive and a towed vessel simply does not come as far up on a beach as a self propelled, and it will be scrapped with less efficiency. Another transport cost is the reused steel to the re-roll mill or smelter, which also plays a role, particularly in EU/OECD, where fewer smelters may be buying steel. 2.3.1 Price differences across countries and regionsA ship broker company (Clarkson's in London) maintains a database, which includes almost all larger ships sent for demolition from January 1st 1994 to May 31st 20022. In total the database has about 3,800 records of ships sent for demolition. Over such a long time span the scrap metal price has varied considerably, but it is still clear that the prices in Asia are generally much higher than the prices offered in OECD countries, cf. Table 2.4. Table 2.4
Source: Clarkson's demolition database, 2002. "Indian Sub cont." means that it can be from any of the three countries India, Bangladesh or Pakistan. The only three OECD countries with more than 10 demolitions in the covered period are Turkey, Spain and Mexico. These are also the three countries with the lowest average scrap metal prices offered. For the period 1994-2002 the level for these countries is around 50-80 US$/LDT while it is 140-160 US$/Ldt in Asia. China is slightly lower with 134 US$/LDT being the average price offered. In the 1980's scrap prices were as low as 50 US/LDT in Asia. An Aframax tanker scrapped in the fall 2001 fetched only $130/LDT. A similar ship, sold to the same buyer one year earlier gave $180/LDT (Clarkson 2001). Table 2.5
The standard tanker and bulk carrier will command quite different prices in the various shipbreaking regions. Although it is difficult to compare the prices in Europe, which are based on interviews rather than actual market prices, with the Asian prices, the difference of up to 1.2 to 1.5 million USD is a considerable incentive, when the choice of demolition yard is taken.
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