Cleaning Up Graveyards of Steel:

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