May/June 1995
Is Shipbreaking in the Western World Shrinking? The United States—and Europe—long ago lost much of its ship dismantling industry to countries that can scrap vessels more cheaply. And today the remaining narrow niche of military ships appears threatened.
By Jeff Borsecnik
Jeff Borsecnik is an associate editor of Scrap Processing and Recycling
In some respects, shipbreaking is one segment of the recycling industry that operates today much as it did in its early days.
For one thing, says Richard Jaross, a veteran U.S. shipbreaker and president of Wilmington Resources Inc. (Wilmington, N.C.), the basic process of dismantling a ship hasn't changed since the 1940s. Large chunks of metal are removed from the vessel and cut apart on shore until the bottom of the ship can be dragged up an incline.
For another, shipbreaking is still an extremely labor-intensive endeavor, requiring plenty of hand processing to cut up huge hulks of scrap. "There is nothing as labor-intensive as shipbreaking," notes Alfred Nijkerk, a veteran European breaker who now heads Nijkerk Consultancy (The Hague, Netherlands). "You can't put a ship in a shredder or a shear," he adds, explaining that retired vessels are mostly cut by torch. Of course, advances have come from the introduction of hydraulic mobile shears and plasma torches--which Jaross says have helped to "revolutionize" the business--but even with these technological developments, breaking a ship remains a laborious, tedious process.
For all the similarities between shipbreaking today and shipbreaking 50 years ago, however, there is a significant contrast between the eras: where ships are broken. The developed countries that once had significant roles in the business are only minor players in the international shipbreaking industry these days, having lost their prominence to developing nations, where cheap, plentiful labor and sparse environmental rules enable shipbreakers to offer higher bids on old vessels than their counterparts in the United States and Europe. As Nijkerk puts it, “the prized vessels move to the cheapest-labor country.”
Even military ships and other government vessels are scrapped abroad in many instances, despite policies--covering military ships in the United States , at least--that say preference should to be given to domestic breakers.
When Labor Plus Environment Are Less Than Towing
The big shift toward towing ships to foreign lands for scrapping began in the early 1970s, when a boom in ferrous scrap prices--and, hence, a boom in ship scrap values--helped to compensate for the cost of towing ships long distances, according to Alan Mesh, president of Transforma Marine Corp. (Brownsville, Texas), a processor of small ships, barges, and other maritime equipment such as oil drilling rigs, and one of the few remaining fulltime U.S. shipbreaking operations.
Around that same time, and ever since, regulations related to asbestos and other materials-especially polychlorinated biphenyls (PCBs), but also chemicals, oil, and lead-based paint--have made shipbreaking much more complex and expensive for companies in Western World countries, adding to their labor cost disadvantage.
Thus, today, if the savings in, labor costs and regulatory avoidance presented by scrapping a vessel abroad outweigh the costs in getting it there, it typically goes. Under this equation, larger vessels (which generally have higher values) are likely to be sent away for breaking, while small ones are more apt to go under the torch near where they ended their service lives.
The result: Shipbreakers in the United States today mostly handle military vessels restricted from going abroad, barges, small ships too badly damages to be towed abroad, and other miscellaneous maritime equipment. Europe has seen a similar decline, with what little business remains centered around small coastal vessels, dredging boats, small warships, and river barges Nijkerk reports.
Asia-Bound
So where has all the shipbreaking gone? Mostly to Asia, where a number of countries have cleared areas for huge shipbreaking operations to take advantage of their potential labor pools and relatively lax environmental rules. (Ships broken in Asia are often simply driven up onto a beach at high tide, then cut apart at low tide--with little regard to contaminants released into the environment, a practice widely criticized by international environmental groups and shipbreakers in other nations.)
Taiwan was No. 1 in the industry for much of the 1970s and 1980s, setting a record in 1986 of 344 vessels totaling 3.69 million light displacement tons (ldt) broken,according to Reuters Asia-Pacific Business Report. Though Taiwan still scrapped almost a third of the shipping capacity put to the torch in 1988, according to Lloyd’s Register (London), its role subsequently declined rapidly following revelation of corruption and environmental problems prompted by an earlier explosion at its huge shipbreaking facility.
India climbed from second place to take the lead in 1989, and was responsible for breaking more than 60 percent of the shipping capacity scrapped that year, according to Lloyd’s Register. By 1992, however, China headed Lloyd’s list, and in 1993 that country’s ambitious shipbreakers cut 159 vessels representing nearly 5.8 million gross tons of capacity, which is more than is broken worldwide some years. (Lloyd's tracks vessel capacity--gross tonnage as a measure of volume--rather than actual vessel weight—ldt—because its main concern is commercial shipping.)
But India again took the lead in 1994, according to preliminary numbers from Lloyd's Register, apparently as a result of changes in Chinese economic policy that made that country less competitive in purchasing vessels. Today, a single Indian shipbreaking yard called Alang handles about a third of the world's shipbreaking, and it's being expanded.
India 's neighbor Pakistan has also become a noteworthy player, having recently lowered duties and eased payment terms to improve the competitiveness of its shipbreaking industry. Pakistan specializes in very large crude carriers and broke 18 of the 42 scrapped worldwide last year, according to American Metal Market.
Scrap at a Premium
The prices shipbreakers in these countries pay for vessels vary widely by ship type, condition, and location, as well as current scrap quotes, but recent values reported have been “upwards of $90 to $150 per ldt,” noted Jaross. Furthermore, he reports, some of the prized huge tankers bring as much as $170—well more than ferrous scrap prices even at today’s high values. By contrast—and it illustrates their cost disadvantages—U.S. breakers have recently paid about $30 to $50 per ldt for military vessels, he says.
How can Asian breakers pay more per ton for for ships than scrap costs? “I’ve been trying to figure that out for 15 years,” admits Mesh. His best guess is the combination of cheap labor, a lack of environmental control costs, and scrap demand in countries that are net importers. Plus, he figures, ships are seen as a "cheap raw material for new steel, which is a value added product that can in turn be exported for dollars." Shipbreaking also generates jobs.
Of course, ships--especially military vessels and tankers--contain high-value nonferrous scrap as well as usables ranging from lifeboats to diesel engines, boosting their overall value.
But probably a more important reason the Asian breakers can pay so much for the ships is that in most cases about 65 to 70 percent of a large vessel's weight is steel plate that is not remelted, but merely heated and rerolled into new products like rebar and merchant bar, Nijkerk estimates. So essentially "the ships equate to billets," not scrap, says Jaross, and the labor to process the material into reroll plate is "probably less than $30 a ton--that's cheap billet," he explains. In fact, rerolling mills are often connected with large shipbreaking facilities. China, in particular, has a strong demand for rerolled products and is boosting its shipbreaking and rerolling capacity.
Adding Insult to Injury?
With this backdrop, it's fairly clear why shipbreakers in more-developed countries have lost out on commercial vessels to the Asian breakers. What it doesn't explain, however, is why government ships--which you might expect to be confined to domestic operations--are also routinely sold to ship dismantlers in other countries.
Then again, nothing really explains that issue, U.S. shipbreakers quickly point out. In fact, this topic is one of the biggest frustrations facing breakers in the United States --and perhaps those in Europe as well. And it's particularly disturbing now that the Cold War has ended and Western military outfits are being "downsized," which would seemingly provide a boost to the beleaguered industry.
The U.S. Maritime Administration, which manages the U.S. reserve fleet, which consists mainly of transport vessels, began exporting surplus ships for recycling at the close of World War II, but the practice was ended in the 1970s when domestic breakers pressured the government to reserve these Liberty and Victory ships for U.S. breakers. The domestic-only policy was soon sunk by loopholes, however, Jaross reports.
Then, in the early 1980s, the government called a two-year hiatus on ship sales to figure out how to deal with asbestos, which was used extensively in older ships, says Mesh, noting, "They decided the best thing do was ship it overseas." More recently, however, when the Maritime Administration faced a similar dilemma related to PCBs in old ships, it changed its bid policy to prohibit the export of ships with PCBs in concentrations of more than 50 parts per million, Jaross says.
As for military ships, the U.S. Navy sells vessels no longer needed through the Defense Reutilization and Marketing Service (DRMS), which disperses excess Department of Defense property, including scrap. Contrary to common belief, there is no law requiring combat vessels to be scrapped in the United States , though current Navy policy holds that they should be domestically dismantled "whenever practical." (Other NATO members no longer have such a policy, Nijkerk says, noting, "They let virtually every warship go to any country today--there are no more secrets." Russia is also selling large numbers of its military vessels abroad.)
Critics accuse the U.S. government of inconsistency in handling ship sales and circumventing the domestic-only policy. The issue has come to a head with a suit brought against the U.S. government and the secretary of the Navy by Schnitzer steel Industries Inc. (Portland, Ore.) for what it sees as the improper handling of the sale of the USS Bennington, a 27,000-ton aircraft carrier sold for scrapping a little more than a year ago.
Suing Over Shipbreaking
The Bennington ;was sold to a company called Resource Recovery Inc (Stamford, Conn.) for $200,000, according to a Schnitzer spokesman. But Schnitzer, which had earlier proffered, then rescinded, a bid for the vessel over fears about the cost and environmental implications of scrapping it in the United States as required in the invitation to bid, contends that the terms of the deal were altered after the contract was awarded.
According to an attorney for Schnitzer, Resource Recovery later offered the Navy would allow the vessel to be towed to India for dismantling. The Navy subsequently modified the contract, allowing the ship to be towed abroad once Resource Recovery had performed some initial dismantling. Schnitzer’s attorney surmises, “What happened was that the Navy got taken but basically split the difference with the contractor, and we think that’s clearly unlawful.
Schnitzer is miffed that the Navy changed the terms of the sale without allowing all of the bidders a shot at the new deal. According to the company's counsel, making such a major modification without again going through the bidding process is a violation of government contract law. As Tom Zelenka, Schnitzer's manager of public affairs, puts it, "It's a situation where the playing field pure and simple is not level."
The suit asks for a preliminary injunction preventing the export of the ship--although it has already left the country, sold at a profit of several million dollars, according to various sources—as well as voiding of the contract provision that allowed the ship to be exported.
Resource Recovery, which is not targeted by the suit, has contended that it “scrapped” the ship in the United States as required in the original invitation to bid because it removed the superstructure and other components before towing it abroad, rendering the vessel nothing but a hulk fit for metal reclamation.
Though the Navy's modification of the contract clearly stated that the hull could be taken to India for scrapping, the department apparently accepted Resource Recovery's assertion that the ship had, in fact, been "scrapped" before leaving the United States , according to the Schnitzer attorney. “I think the rationalization the Navy got begs common sense and credulity,” he says. “They deemed it to be scrap. Well, you can deem it to be night and you can deem it to be October, but it’s day and its April.”
Though Schnitzer realizes the Bennington isn't coming back, the goal of the suit is to "get the judge to tell the Navy that it broke the law and to keep it from happening again," according to the company's attorney, who notes the issue could apply to a number of other vessels already sold for scrapping as well as those soon to be sold. A U.S. Department of Justice attorney handling the Bennington case declined to comment.
Wastes or Assets?
There is major conflict of interest that lies behind the Bennington case and other government ship sales, according to private shipbreakers: On one hand, the Navy has a responsibility to ensure that the ships it sells for scrapping are handled in an environmentally responsible manner, says Bill Kelley, managing principal of Cresmont Inc. (Seattle), a marine engineering firm that has leased a former U.S. seaplane base in Astoria, Ore., with hopes of using it to dismantle military vessels. "They have hazardous material on their hands that they need to dispose of," he says.
On the other hand, the Navy seeks to recoup as much money as possible through the sale of its ships. "The pressure is there to get dollars no matter what the cost or issue," says Schnitzer's Zelenka.
Meeting both goals is simply impossible, argues Arthur Engel, chief executive officer of Southwest Marine Inc. (San Diego), a shipyard defense contractor, who set up a subsidiary that scrapped a destroyer, a heavy cruiser, and an aircraft carrier in Terminal Island, Calif., during the early 1990s. It wasn't a pleasant experience from the way he tells it.
"I won't buy Navy ships today and cut them up," says Engel. "It's impossible to do that and make money considering the environmental issues." He notes that it cost his firm $2 million just to remove the asbestos from the aircraft carrier. "The long and short of it is that we lost millions of dollars in processing, and it's all attributable to the removal of hazardous material." The bottom line, says Engel, is the ships "all have negative value. Cleaning them up environmentally is one issue. Then you have residual value."
Others don't put it quite that strongly, but seem to share Engel's concerns about the Navy's capacity to pass the buck on environmental risks. "They sort of dump all their environmental problems on the scrap dealers, and no matter what we find, we carry the burden," says Jaross. He says the Navy knows what potentially hazardous materials are in the ships and should have some responsibility for dealing with the problems. By not doing so, "they are killing our domestic industry," he says, complaining that shipbreakers "take all the risks and get no reward for the effort."
Kelley adds to the debate: "The Navy should be looking to buy compliance, not profits. No one else in this man's world looks to make money on their hazardous waste. The Navy has to realize there's no real asset value. What they need to do is sell ships for a dollar to someone who will responsibly scrap them and not expect to make revenue." Or as Jaross suggests, “The government may eventually pay contractors to do what we are doing, which is fine with me.”
Losing Combatants?
While U.S. shipbreakers may think that sounds like a logical direction for the government to take, recent DRMS maneuvers indicate that it's unlikely to happen anytime soon. In fact, the situation could go the complete opposite direction if the government decides to throw out the domestic-only policy--which is not out of the realm of possibilities.
The potential for this change traces back to January, when scrap sales of Navy ships were put on hold for an indeterminate time to allow the Navy to review the impact of proposed changes to PCB regulations under the Toxic Substances Control Act on its ship sales. (The proposed rule, published in the Federal Register on Dec. 6, 1994 , aims to ease PCB storage and disposal requirements to encourage better reporting from PCB generators, according to an Environmental Protection Agency source.) But the DRMS reports that the entire ship sales program, including the policy that reserves combatant vessels for domestic scrapping, is also under review during the moratorium.
(For details on DRMS ship sales policy and contacts, see pages 134-136 in this issue.)
Shipbreakers questioned about this possibility agree that if any military ships are allowed to go abroad for scrapping, it's only fair they all be. Most feel to do so would be a mistake, however. "When you export ships, you're also exporting jobs, and that's wrong," says Jaross. "And you are dumping hazardous material on a foreign country that doesn't abide by our law. To me, that's immoral and probably illegal--but they get away with it."
Is Shipbreaking in the Western World Shrinking? The United States—and Europe—long ago lost much of its ship dismantling industry to countries that can scrap vessels more cheaply. And today the remaining narrow niche of military ships appears threatened.