For decades, the dangerous and polluting
ship-breaking yards that stretch for six miles along the beaches of Alang,
India, successfully resisted the efforts of activists and foreign governments
to shut them down. But in recent months, they may have finally met their match
in a different adversary. Desperate steel mills in China, whose domestic
markets have diminished in a slowing economy, are dumping their surplus on India.
Suddenly, the thousands of tons of steel
generated by Alang's ship recyclers cost more than much of what China is
sending to Indian shores. The impact has been profound. The number of Alang
ship breakers has declined to 50 from 100 last year, according to the Ship
Recycling Industries Association of India.
Cheap Chinese steel, however, is just the
immediate problem for Alang's ship breakers. A bigger threat from China is that
the country's ship breakers have been cleaning up their act with the government's
help and are poised to offer the world's shipowners sustainable, low-cost
ship-breaking services, at least compared with those in Europe and the U.S.
Though China won't extinguish Alang completely, its Chinese-induced travails
mean that it's in far worse shape to upgrade and compete with China's more
environmentally advanced ship breakers.
That's not how things were supposed to
work out for Alang. Its ship-breaking industry dates back to the early 1980s
and an early boom in India's construction sector. The area's recyclers saw an
opportunity to provide cheap steel to mills and contractors, and they started
importing used ships to demolish.
Alang's access to tens of thousands of
low-cost laborers gave it a large advantage over ship breaking in the developed
world, where labor costs in particular made the dangerous and dirty work far
less profitable. Similarly, environmental regulations in the developed world --
and especially the expectation that ships would be dismantled in concrete dry
docks to prevent contamination -- posed a prohibitively expensive barrier to
entry for recyclers. In Alang, however, there is no need for a large investment
-- the ships are just driven on to the beach and disassembled there. In good
years, the beach and its more than 60,000 directly employed workers can recycle
hundreds of the world's largest ships into rebar and other basic construction
materials.
Operations have improved recently in
Alang, but they're nothing compared with the quiet transformation of China's
ship-breaking industry. It began in the early 1990s and gathered momentum in
the 2000s, when Danish shipping giant Maersk teamed up with a recycling company
near Shanghai to create a ship-breaking operation that combined its high
European standards with China's relatively cheaper labor and capital-investment
rates. Since then, the Maersk operation has been spun off while still upholding
the same standards. It and a government-supported Chinese yard in south China
are now seeking recognition from European regulators to handle their ships.
Nonetheless, even during bad times, the
cost of recycling in China is still higher than it is in Alang. Consequently,
India's ship breakers have long been able to pay more for a ship than their
Chinese rivals have, so the old ships continued to steam past China to Alang
and other South Asian ports.
Then the Chinese government stepped in.
In 2013, in search of a means to bolster
ship recycling and spur an already sputtering economy, the government adopted a
massive ship-recycling subsidy that was recently extended to 2017. Chinese shipowners receive $120 a ton for a recycled ship
and an extra $120 a ton applied to the purchase of a new one. There was
no longer any economic incentive to send old Chinese ships anywhere but China,
and Alang -- and other South Asian destinations -- began to lose out. The
consequence for the industry has been substantial. From January to April,
before the most recent tumult hit full force, China recycled 65 ships, 24.8
percent of the 262 scrapped worldwide during the period, according to the NGO
Shipbreaking Platform, behind India's 69 and Bangladesh's 66. In all likelihood,
it will be No. 1 in the next quarter.
That momentum is unlikely to fade. Alang,
hobbled by a collapse in steel prices, is in little position to make capital
investments, much less compete against a Chinese state-subsidized industry.
Even worse, from Alang's standpoint, is that the ship-breaking industry appears
to be tilting away from Alang and its old methods to China and its new ones.
(Turkey, notably, is also making a play to become a sustainable ship recycler).
A new European Commission regulation expected to come into effect later this
year requires that European-Union-flagged ships be recycled only in approved,
sustainable facilities. Though there are ways to circumvent the regulation, the
EU seems particularly determined to punish those who try.
China's ascendancy as a ship breaker
won't spell the complete demise of Alang. Countries and shipowners will still
send ships to its beaches. But thanks to government investment and a collapsing
steel price, China now has a big head start on becoming the destination of the
future. Alang, unexpectedly, will have to play catch-up.
Source:
Bloomberg view. 31 July 2015
http://www.bloombergview.com/articles/2015-07-31/steel-glut-and-china-subsidy-clean-up-graveyards-of-ships
