The ship recycling conundrum: an econometric analysis of market dynamics and industry trends.
Ship recycling has received considerable attention during the last two decades for avariety of reasons and the industry is currently under a thorough scrutiny with thelikelihood of the adoption of a new multilateral convention under the auspices of theInternational Maritime Organization (IMO). This study applies econometric modeling to aunique dataset to provide a holistic insight into the dynamics of the ship recycling market.The dataset contains information on 51,112 ships over 100 gt and includes 748,621 eventsover a period of 29 years. The binary logistic regression models confirm a negativerelationship of earnings and a positive relationship of scrap prices for all locations whileBangladesh seems to be more prone to changes in the shipping market than the otherlocations. Flag and ownership patterns vary across scrapping locations with Malta anCyprus indicating potential importance from a registry perspective versus other majorflags which do not reveal any significant importance. The overall safety profile of a vesselseems to be less important towards the probability of a ship being scrapped. Possibleimplementation of the convention under EU jurisdiction is mostly likely affect Turkeywhile non ratification of one of the major flags not under EU jurisdiction will most likelyaffect China.
1
Econometric Institute, Erasmus Univ., P.O. Box 1738, NL-3000 DR, Rotterdam, The Netherlands,knapp@few.eur.nl
2
United States Merchant Marine Academy, 300 Steamboat Road, Kings Point, NY 11024, USA,kumars@usmma.edu
3
EMSA, Avenida Dom Joao II, Lote 1.06.2.5, 1998-001 Lisbon, Portugal,anna-angela.bobo-remijn@emsa.eu.int
The following disclaimer is added to this paper: “The report and related findings discussed in this paper do not reflectthe view of the United States Maritime Administration and the European Maritime Safety Agency”.
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1. INTRODUCTION
The recycling of ships has received considerable attention during the last two decades fora variety of reasons. For one, it is an eminent application of Akamatsu’s
flying geese
paradigm (1962), a Japanese economic model that is built around the symbolism of geeseflying in unison. The metaphor is often used to explain the industrial growth of EastAsian countries with Japan being in the lead, and could very well be applied in the case ofship scrapping by observing how the foci has shifted in the post-WWII era from Japan toSouth Korea to China to primarily South Asian countries today based on shiftingcomparative advantages. More importantly, in recent years, it has gained the attention ofenvironmental advocates and human rights activists as well as a host of regulators and policy makers, engrossed in “greening” maritime operations and ending unsafe labor practices. In addition to the unilateral and regional (i.e. EU) initiatives of various nationsgeared toward responsible ship recycling, there are ongoing multilateral discussions at theInternational Maritime Organization that focus on a cradle to grave regulatory approachin the life-cycle of a ship.The Marine Environment Protection Committee (MEPC) of IMO was requested by theGeneral Assembly to develop a new legally-binding instrument on ship recycling(Assemby Resolution A.981(24), providing regulations for:
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The design, construction, operation and preparation of ships so as to facilitate safeand environmentally sound recycling, without compromising the safety andoperational efficiency of ships;
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The operation of ship recycling facilities in a safe and environmentally soundmanner; and
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The establishment of an appropriate enforcement mechanism for ship recycling,incorporating certification and reporting requirements.The key objective of the Convention is to effectively address the environmental,occupational health and safety risks related to ship recycling, taking into account the particular characteristics of world maritime transport an the need to secure the smoothwithdrawal of ships that have reached the end of their operating lives.The proposed International Convention on the safe and environmentally sound recyclingof ships (“the Convention”) is planned for adoption by the year 2009. This will slightly predate the anticipated peak in ship scrapping expected to happen in 2010 because of themandated accelerated phase-out of single hull tankers. However, the convention is notexpected to come into force before 2012 at the earliest, and therefore interim measuresmay have to be considered by parties involved to address the expected peak in shiprecycling.At the regional level, the European Commission has recently launched a Green Paper onship dismantling (COM(2007) 269 final, 22 May 2007) in order to prepare the ground forfuture action in the context of EU policies and to address the interim period, i.e. until thefuture Convention will come into force. The aim of the Green Paper is the protection ofthe environment and human health rather than proposing the reinforcement of shiprecycling volumes in the EU, which would carry the risk of depriving countries in SouthAsia of a major source of revenue.
3The above scenario raises a number of questions that merit serious economic analyses. Itis expected that some major ship recycling nations and flag states will not immediatelysign and ratify the convention, which may lead to the development of two different shiprecycling markets operating in parallel. Whereas one market will cover the conventionships that are recycled in facilities that comply with the convention’s standards of safeand environmentally sound recycling, a separate market for recycling non-Party ships infacilities operating in States which are not a Party to the convention. Prevailing marketdynamics and corporate social responsibility trends will determine how these two marketswill develop and co-exist. It is worth to mention in this context that the US has submitteda proposal to MEPC to introduce a provision in the convention allowing compliantrecycling facilities located in non Party States to have access to the Convention market,i.e. to recycle vessels flying the flags of Parties to the convention. This proposal is still being negotiated at IMO.Veldeler (2006) touches upon the topic of value chain responsibility of shippingcompanies in the context of industry conditions and the necessary changes needed totransform ship recycling into a vital service participant rather than maintenance of the proverbial
bottom of the heap
status quo. A report by ECORYS Transport (2005) raisesthe possibility of establishing a ship recycling fund. Mikelis (2007) presents a timely andhighly informative statistical overview of ship recycling and emphasizes some of the keyeconomic relationships in the ship recycling market such as a possible correlation between freight rates and ship recycling prices and the impact of other aspects such aslocal labour costs and the demand for scrap steel. The European Commission (DG ENV)study on ship dismantling and pre-cleaning of ships (COWI / DHI, June 2007) addressedthe status and projections for European end of life ships until 2020. In general, other thanthe above contribution, there is a dearth of empirical studies in this field.The objective of this study is to apply econometric modeling to test some of therelationships hypothesized by Mikelis (2007) and elevate scholarly treatment of shiprecycling to the next level. It uses the probability of a ship being scrapped to provide better insight into the dynamics of the ship scrapping market. The study is based on aunique dataset that combines information from multiple data sources. The data gatheredcompiles information about changes in ship particulars such as ownership, registry, andclassification society, and integrates them with the results of safety inspections, changesin shipping market conditions and also information on ship scrapping. It is believed thatthe uniqueness of this data will allow a more accurate measurement of the dynamics ofship recycling.The outcome of this study may benefit the ongoing multilateral discussions at IMO. Itwill help clarify the proposed convention’s impact on the ship recycling market and itseffectiveness in improving standards for ship recycling worldwide. Section 2 describesthe construction of the dataset used in this article and Section 3, an analysis of the currenttrends in shipping markets including a discussion of ship demolition markets in theoverall context. The section discusses some descriptive statistics helpful in understandingthe study and also defines the variables used in the econometric analysis. Section 4 provides mechanics of the econometric analysis and interpretation of results. Theconcluding section, Section 5, summarizes main findings of the study and its potentialcontributions to any dialog on ship recycling in future years.
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