Shipowners have nowhere to hide

Singapore-based consultancy says price remains key factor for scrapping decisions but sees turn of toxic tide amid growing market pressure

Many shipowners remain focused on maximising profit by gaining the highest offer price when scrapping vessels but risk a business backlash from non-compliant shipbreaking practices amid increasing market and regulatory pressure for green recycling, according to Sea Sentinels.

“There is becoming nowhere to hide for vessel owners that select recycling yards solely on the basis of price without paying attention to safety and environmental risks, while also ignoring the need for transparency, because the market is demanding it,” says Rakesh Bhargava, chief executive of the Singapore-based ship recycling consultancy.

South Asian shipbreaking yards typically offer higher prices for tonnage than competitors in other major scrapping locations such as Turkey and European countries. But some of these yards also have an ignominious track record of serious accidents and damage to coastal ecosystems, though many have invested heavily and raised yard standards to acceptable levels.

Therefore, it is vitally important for the discerning shipowner to arrange verifiable audits of the yards prior to choosing the right one, according to Bhargava.

Cash is king

Figures from the NGO Shipbreaking Platform reveal as many as 446 vessels – including large tankers, bulkers, floating platforms, cargo and passenger ships – were recycled at locations in the Indian subcontinent in 2020 out of a total of 630 units broken up worldwide, amounting to nearly 90% of gross tonnage dismantled globally.

But Bhargava says most of the vessels recycled at these locations presently do not have any independent audit procedure of the recycling process to verify compliance with local and/or international standards

“Historically, the shipbreaking industry has been unregulated and without transparency, with working conditions and practices varying between yards and locations, and standards governed by economic considerations and local rules on corporate social responsibility,” he explains.

There has been a regulatory shift over the past decade with adoption of the IMO’s Hong Kong Convention (HKC) to regulate shipbreaking practices – though it has yet to be enforced – and the EU Ship Recycling Regulation (EUSRR) that requires EU-flagged vessels to be recycled at one of 41 approved yards on an official list.

“However, enforcement is still a major challenge today and cash is king as the highest offer price is still the key criterion for many shipowners when selecting a yard, although some more discerning owners accept an allowance in price for a minimum standard of HKC or EUSRR compliance,” he says.

A major shipping company has, for example, estimated that it can earn an additional $1-2 million per ship by using beaching yards in Alang, India.

Transparency initiative

Bhargava says that, while some yards claim to have upgraded their facilities in line with the HKC, there remain issues such as pollution, lack of medical facilities, breaches of labour rights and a lack of capacity to manage hazardous waste.

However, he believes the tide is now turning against toxic shipbreaking practices as environment, social and governance (ESG) principles increasingly dictate the shipping business agenda amid pressure from regulators, reinforced by demands for green recycling from banks, investors and cargo owners that would all require independent verification of the recycling process.

“A number of shipowners are now realising that exercising corporate social responsibility with transparency of shipbreaking operations is not just an ethical duty but is also becoming critical to the future of their business,” Bhargava says.

The Ship Recycling Transparency Initiative (SRTI) is an online platform, hosted by the Sustainable Shipping Initiative (SSI), that is a market-driven approach to promote sustainable and responsible recycling through voluntary disclosure by participating shipowners of their practices in a joint forum with multiple industry stakeholders.

SSI executive director Andrew Stephens says: “We see an increasing awareness and concern for sustainable ship recycling in order to manage and mitigate supply chain risks across the ESG spectrum.

“This can be seen especially from the demand side with support for the SRTI from financial stakeholders such as banks, investors and lenders, in addition to cargo owners and shippers.

‘Mitigating risk’

“These stakeholders are concerned with mitigating risk and reducing exposure, and this is driving requirements for safer and improved practices and performance in terms of sustainable recycling that includes providing evidence of this.”

There are now 13 shipowners – including Hapag Lloyd and Maersk – signed up for the SRTI, among a total of 30 signatories from across the shipping value chain.

The SRTI is a single access point for a stakeholder, such as an investor or pension fund, to gain all the information they need on shipowners’ recycling practices so they can evaluate the landscape and create benchmarking analysis for informed decision-making, according to Stephens.

“So there is a market value in transparency for those shipowners willing to disclose. The call for transparency is rewarded by the demand side’s engagement for investing, lending and procuring services,” he explains.

“The key question though is how shipowners can monitor performance and ensure verification against their own defined standards because an important part of their disclosure is to show how they are addressing the gap: ‘This is what I want, but how do I know it is being done’.”

He says some may “have their own boots on the ground” at recycling yards while others will rely on third parties to perform assurance and verification.

Verifying best practice

“It really depends on their breadth and depth in terms of resources and frequency of recycling. Long-tail of owners that are not disclosing today may well use a third party as they do not have the in-house resources given they only carry out the occasional ship recycling project,” Stephens says.

Sea Sentinels provides on-site supervision for enforcement of regulations to verify safe and environmentally sustainable recycling at yards regardless of location, as well as prepare documentation of best practice for compliance to underpin a company’s green recycling policy.

Bhargava says: “The regulations are clear and there is a legal risk for non-compliance aside from reputational risk for shipowners as well as charterers, shippers, financial institutions, lenders, investors and shareholders.”

Recent court rulings in Europe have upheld complaints against shipping companies engaged in illicit shipbreaking practices and he believes this, along with the latest EU regulations, is changing shipowner perceptions due to the threat of legal liability, as well as negative publicity.

Conversely, Bhargava believes shipowners have a lot to gain by promoting a green recycling policy through relatively low-cost supervision that would boost their corporate social responsibility (CSR) profile in the market and would also “indirectly have commercial benefits”.

“At the time when recycling contracts are negotiated, the only tangible visibility is the commercial and monetary benefit,” he says.

“However, there are non-tangible CSR risks if right decisions are not taken at this time which may manifest much later. When they do manifest, the cost for this would be much higher.”