Scrap on the High Seas

What Fuels Ship Recycling?  

While the ship breaking market holds much in common with its “land scrap” processing counterparts, some of the forces that pilot its course are unique. Here’s why.

Statistics on ship dismantling follow suit: According to data compiled by W. P. Sauer Company, a ship brokerage firm in Tequesta, Florida, vessels totaling 85,557 tons were scrapped in the United States in 1983. That figure was reduced to 46,863 tons in 1988 and to less than 20,000 tons last year.

The United States, however, is not the only country experiencing waning ship breaking activity. W.P. Sauer's statistics show that ship dismantling has seen a steady, worldwide decline since its peak in 1985.

Although the few still involved in the business are concerned about these numbers, they know that the market for ship breaking, like that of every other scrap recycling segment, is cyclical. "It always changes year to year," says Ed McIlvaney, a broker with W.P. Sauer Company. "I have no doubt the market will pick up again." How quickly and in what manner it does so are not easily predicted, but an examination of the economic, social, and geographical forces that fuel the ship breaking market provides insight.

Riding the Commodity Waves

Prices paid for old vessels play a key role in the fluctuating ship dismantling market. And key among the factors that influence prices are commodity values.

The primary products generated by most ship demolitions are plate and structural steel and other ferrous scrap. Therefore, prices paid for old vessels usually reflect the prices of No. 1 and No 2 heavy melting scrap. However, specific details about a particular vessel's construction and history influence the prices scrap consumers will eventually pay the breaker, and thus can determine to what extent those heavy melting scrap prices dictate a breaker's bid on a ship.

A ship's construction is important for a few reasons, according to McIlvaney. For one thing, he says, where a vessel was constructed often corresponds to the thickness of its steel plate and the quantity of nonferrous scrap (mostly copper and brass) it yields. Therefore, he notes, U.S.-built vessels frequently command higher prices dm those built in Japan because the former are likely to be made of thicker plates and more nonferrous than the latter. Similarly, tankers are considered more valuable and easier to sell dm dry cargo vessels because tankers contain more nonferrous and are easier to break up, McIlvaney says.

Ships with a lot of riveting usually bring in low bids since riveted sections cannot be rerolled--the predominant consumer use for ship scrap. Furthermore, McIlvaney asserts, breakers usually offer the best prices for vessels owned by those known to keep up the maintenance of their fleets, since a well-maintained ship is likely to yield a higher quality shipplate dm one for which maintenance was minimal.

Secondhand ship values and shipping freight rates also are important influences on the prices paid for old vessels-and have a direct impact on the ship breaking market, too. When prices offered by dismantlers don't keep pace with those two variables, vessels that might have been scrapped may instead be sold as secondhand ships. This has been the case in recent years, says McIlvaney. In the mid- 1980s, the average life span of a ship was 16 to 18 years. Today, he explains, at a time following increasing secondhand values and freight market rates, it's 20 to 23 years.

Mapping out Expenses

The viability of any industry relates to its costs of doing business and ship dismantling is no exception. According to Bart Lawrence, a broker with A.L. Burbank [Ship Brokers] Ltd., Fort Lee, New Jersey, the operating costs associated with ship breaking are important not only as gauges of worldwide prices and market stability, but also as measures of regional prices and market situations.

It's true that some of the expenses required to scrap ships are relatively uniform around the world. These include towing costs for vessels unable to move on their own power, insurance on the ship and its towing, towing preparation charges, port costs, and brokers' commissions. However, Lawrence points out, other operating costs give some world regions significant competitive advantages in ship breaking over other regions.

Prominent among the advantages is ship dismantling's labor costs. Unlike most other scrap recycling operations, which rely on machinery to perform much of the heavy-duty processing work in their businesses, ship, scrapping is essentially a manual activity. There's no such thing as a ship shredder.

According to Alan Mesh, president of Transforma Marine Corporation, Brownsville, Texas, although some ship dismantling operations employ mobile shears to help break up vessels, most of the cutting is accomplished using hand torches. This slow, intense labor requirement necessitates a low-cost, plentiful labor force uncommon in highly developed areas such as the United States and Europe. Brownsville, because of its high unemployment rate, is an exception to this rule, Mesh says. Nevertheless, ship breakers in nations such as Bangladesh, India, and Taiwan have even larger labor pools to set to work, at wages up to 20 times less than the U.S. minimum wage--which translate to higher bids on old vessels. It's no surprise, therefore, to learn that those three nations--along with China, Pakistan, and Thailand--have been the top ship breakers, in terms of tonnages handled, for the past two years.

Obstacles Cost

Availability of the cheapest labor force doesn't ensure the ability to offer the highest bid for ships to be scrapped. According to W.P. Sauer figures, although wages in the Far East are approximately twice those paid on the Indian subcontinent, over the past decade the highest price paid in a year was $14.00 per ton higher on average in the Far East than on the Indian subcontinent.

McIlvaney attributes this twist to two primary factors. In India, he explains, ship breakers must pay high and often volatile import duty on the vessels they intend to dismantle. There's only a nominal tax in the Far East. In addition, he says, Far Eastern ship breakers have the ability to sell their scrap through a consumers' network that extends throughout the region, a profitmaking advantage over their counterparts on the Indian subcontinent, who sell their scrap to their national steel consumers, which have monopolies on the market.

The role of Far Eastern ship breakers, however, has diminished in recent years, primarily because of the situation in Taiwan. Up until 1988, Taiwan had been the number one ship breaking market m the world for more than 10 years. It dropped behind China to number two in 1988, and plummeted to fifth place in 1989 after a tanker at one of the ship breaking yards in Kaohsiung exploded, causing widespread fatalities. This, explains McIlvaney, prompted the Kaohsiung Harbor Authorities to take over two-thirds of the ship breaking berths at the port, which was the country's recognized ship dismantling area.

Exploring Uncharted Waters

"Without Taiwan," says McIlvaney, "die big question is, where do you take those vessels?" He believes the answer lies with India, Pakistan, and China, each of which, he says; has all the capabilities necessary to fill Taiwan's shoes except one: the foreign currency needed to purchase millions of tons of old ships every year. China likely will be the first to solve its currency requirements, McIlvaney believes, which would make it "a major factor" in the ship breaking market. Chances are good, as well, for Taiwanese breakers to move their operations to another port or to come up with "alternative plans, even relocation to other countries," he says.

With or without Taiwan, Alan Mesh predicts, ship breakers worldwide win see their businesses increase in coming years, although "it's unlikely we'll ever see business pick up to the rates of the 1970s." Why? One reason, he notes, is that more and more vessels are being rebuilt instead of being scrapped, a trend Bart Lawrence attributes most to improved markets in industries that rely on seagoing ships.

A similar trend Mesh foresees is the increased scrapping of ships used by industries with diminishing markets or needs always dealt with. According to Mesh, in the early 1970s, the U.S. ship breaking business centered around government war and cargo vessels. A glut of private tankers turned the market to those vessels in 1974, but by the late 1970s the industry returned to government ships. That trend ended by the early 1980s--when new laws first permitted foreign interests to purchase U.S. vessels--and was replaced by a movement toward scrapping barges and other inland transportation vessels. If oil prices continue to fall, Mesh believes, ship breakers may look to oil rigs as the business of the future. In addition, they likely will handle new types of marine equipment. There are currently as many as 5,000 stationary oil platforms in the Gulf of Mexico, he says, that eventually will need to be recycled.

What Fuels Ship Recycling?  

While the ship breaking market holds much in common with its “land scrap” processing counterparts, some of the forces that pilot its course are unique. Here’s why.

Statistics on ship dismantling follow suit: According to data compiled by W. P. Sauer Company, a ship brokerage firm in Tequesta, Florida, vessels totaling 85,557 tons were scrapped in the United States in 1983. That figure was reduced to 46,863 tons in 1988 and to less than 20,000 tons last year.

The United States, however, is not the only country experiencing waning ship breaking activity. W.P. Sauer's statistics show that ship dismantling has seen a steady, worldwide decline since its peak in 1985.

Although the few still involved in the business are concerned about these numbers, they know that the market for ship breaking, like that of every other scrap recycling segment, is cyclical. "It always changes year to year," says Ed McIlvaney, a broker with W.P. Sauer Company. "I have no doubt the market will pick up again." How quickly and in what manner it does so are not easily predicted, but an examination of the economic, social, and geographical forces that fuel the ship breaking market provides insight.

Riding the Commodity Waves

Prices paid for old vessels play a key role in the fluctuating ship dismantling market. And key among the factors that influence prices are commodity values.

The primary products generated by most ship demolitions are plate and structural steel and other ferrous scrap. Therefore, prices paid for old vessels usually reflect the prices of No. 1 and No 2 heavy melting scrap. However, specific details about a particular vessel's construction and history influence the prices scrap consumers will eventually pay the breaker, and thus can determine to what extent those heavy melting scrap prices dictate a breaker's bid on a ship.

A ship's construction is important for a few reasons, according to McIlvaney. For one thing, he says, where a vessel was constructed often corresponds to the thickness of its steel plate and the quantity of nonferrous scrap (mostly copper and brass) it yields. Therefore, he notes, U.S.-built vessels frequently command higher prices dm those built in Japan because the former are likely to be made of thicker plates and more nonferrous than the latter. Similarly, tankers are considered more valuable and easier to sell dm dry cargo vessels because tankers contain more nonferrous and are easier to break up, McIlvaney says.

Ships with a lot of riveting usually bring in low bids since riveted sections cannot be rerolled--the predominant consumer use for ship scrap. Furthermore, McIlvaney asserts, breakers usually offer the best prices for vessels owned by those known to keep up the maintenance of their fleets, since a well-maintained ship is likely to yield a higher quality shipplate dm one for which maintenance was minimal.

Secondhand ship values and shipping freight rates also are important influences on the prices paid for old vessels-and have a direct impact on the ship breaking market, too. When prices offered by dismantlers don't keep pace with those two variables, vessels that might have been scrapped may instead be sold as secondhand ships. This has been the case in recent years, says McIlvaney. In the mid- 1980s, the average life span of a ship was 16 to 18 years. Today, he explains, at a time following increasing secondhand values and freight market rates, it's 20 to 23 years.

Mapping out Expenses

The viability of any industry relates to its costs of doing business and ship dismantling is no exception. According to Bart Lawrence, a broker with A.L. Burbank [Ship Brokers] Ltd., Fort Lee, New Jersey, the operating costs associated with ship breaking are important not only as gauges of worldwide prices and market stability, but also as measures of regional prices and market situations.

It's true that some of the expenses required to scrap ships are relatively uniform around the world. These include towing costs for vessels unable to move on their own power, insurance on the ship and its towing, towing preparation charges, port costs, and brokers' commissions. However, Lawrence points out, other operating costs give some world regions significant competitive advantages in ship breaking over other regions.

Prominent among the advantages is ship dismantling's labor costs. Unlike most other scrap recycling operations, which rely on machinery to perform much of the heavy-duty processing work in their businesses, ship, scrapping is essentially a manual activity. There's no such thing as a ship shredder.

According to Alan Mesh, president of Transforma Marine Corporation, Brownsville, Texas, although some ship dismantling operations employ mobile shears to help break up vessels, most of the cutting is accomplished using hand torches. This slow, intense labor requirement necessitates a low-cost, plentiful labor force uncommon in highly developed areas such as the United States and Europe. Brownsville, because of its high unemployment rate, is an exception to this rule, Mesh says. Nevertheless, ship breakers in nations such as Bangladesh, India, and Taiwan have even larger labor pools to set to work, at wages up to 20 times less than the U.S. minimum wage--which translate to higher bids on old vessels. It's no surprise, therefore, to learn that those three nations--along with China, Pakistan, and Thailand--have been the top ship breakers, in terms of tonnages handled, for the past two years.

Obstacles Cost

Availability of the cheapest labor force doesn't ensure the ability to offer the highest bid for ships to be scrapped. According to W.P. Sauer figures, although wages in the Far East are approximately twice those paid on the Indian subcontinent, over the past decade the highest price paid in a year was $14.00 per ton higher on average in the Far East than on the Indian subcontinent.

McIlvaney attributes this twist to two primary factors. In India, he explains, ship breakers must pay high and often volatile import duty on the vessels they intend to dismantle. There's only a nominal tax in the Far East. In addition, he says, Far Eastern ship breakers have the ability to sell their scrap through a consumers' network that extends throughout the region, a profitmaking advantage over their counterparts on the Indian subcontinent, who sell their scrap to their national steel consumers, which have monopolies on the market.

The role of Far Eastern ship breakers, however, has diminished in recent years, primarily because of the situation in Taiwan. Up until 1988, Taiwan had been the number one ship breaking market m the world for more than 10 years. It dropped behind China to number two in 1988, and plummeted to fifth place in 1989 after a tanker at one of the ship breaking yards in Kaohsiung exploded, causing widespread fatalities. This, explains McIlvaney, prompted the Kaohsiung Harbor Authorities to take over two-thirds of the ship breaking berths at the port, which was the country's recognized ship dismantling area.

Exploring Uncharted Waters

"Without Taiwan," says McIlvaney, "die big question is, where do you take those vessels?" He believes the answer lies with India, Pakistan, and China, each of which, he says; has all the capabilities necessary to fill Taiwan's shoes except one: the foreign currency needed to purchase millions of tons of old ships every year. China likely will be the first to solve its currency requirements, McIlvaney believes, which would make it "a major factor" in the ship breaking market. Chances are good, as well, for Taiwanese breakers to move their operations to another port or to come up with "alternative plans, even relocation to other countries," he says.

With or without Taiwan, Alan Mesh predicts, ship breakers worldwide win see their businesses increase in coming years, although "it's unlikely we'll ever see business pick up to the rates of the 1970s." Why? One reason, he notes, is that more and more vessels are being rebuilt instead of being scrapped, a trend Bart Lawrence attributes most to improved markets in industries that rely on seagoing ships.

A similar trend Mesh foresees is the increased scrapping of ships used by industries with diminishing markets or needs always dealt with. According to Mesh, in the early 1970s, the U.S. ship breaking business centered around government war and cargo vessels. A glut of private tankers turned the market to those vessels in 1974, but by the late 1970s the industry returned to government ships. That trend ended by the early 1980s--when new laws first permitted foreign interests to purchase U.S. vessels--and was replaced by a movement toward scrapping barges and other inland transportation vessels. If oil prices continue to fall, Mesh believes, ship breakers may look to oil rigs as the business of the future. In addition, they likely will handle new types of marine equipment. There are currently as many as 5,000 stationary oil platforms in the Gulf of Mexico, he says, that eventually will need to be recycled.