Ship Recycling Scenario in India
P S Nagarsheth, Ex-Shipbreaker

India is known as the most favourable destination for Ship breaking & recycling industry worldwide with Alang, the largest ship recycling yard in the world. In this article, the author shares much-needed insights into the challenges & initiatives that will have impact on the working of the industry in India.

Ship breaking industry supplies substantial quantity of Re-rollable and steel melting scrap for scrap based re-rolling mills and induction and arc furnaces. Ship breaking is mainly viable where scrap based re-rolling mills are operative. More than 90 per cent of ship breaking in the world is taking place in India, Bangladesh, Pakistan, China and Turkey. Direct rolling of Re-rollable scrap saves one process of melting. This industry helps to increase the availability of such semi-finished material. Recognising the importance of ship recycling industry, the govt. has reduced the import duty on ships imported for demolition from 5 per cent to 2.5 per cent, equivalent to that of ‘melting scrap’, in the last budget.

Internationally scrap is defined only in one category i.e. ‘Melting Scrap’. In India and developing Asian countries, scrap is segregated into two categories, one is MELTING SCRAP and the other is RE-ROLLABLE SCRAP. Definition for melting scrap is same nationally and internationally. There is no definition given for Re-Rollable scrap internationally as very few countries have Re-rollable scrap processing capacities. India had a customs tariff heading previously for ‘Re-rollable scrap’ but following the introduction of harmonised international tariff headings, there is no tariff heading now for ‘Re-rollable scrap’. Thus, technically import of Re-rollable scrap into India is banned at present and ship breaking industry faces the problem of clearance of its Re-rollable scrap output, although Indian Standard 2549 defines Re-rollable scrap as also the import policy. Bangladesh has introduced a tariff heading for import of Re-rollable scraps to solve this problem.

I would like to list the issues which will have impact on the working of the industry:
  • Code on Ship Recycling enacted by Steel Ministry
  • IMO Hong Kong Convention and Guidelines
  • Basel Convention
  • EU Regulations
  • Quality Control Order under BIS Act
  • Japanese Proposal
  • Amendment to Merchant Shipping Act
  • Proposed Admiralty Bill
  • Proposed change of Administrative Control from Steel Ministry to Shipping Ministry
  • JPC Study on Steel Scrap
  • GMB Policy
  • Import of Left over bunker in ships
  • RBI relaxation in respect of payment for import of ships for demolition.
Code on Ship Recycling
Ministry of Steel under the orders of Supreme Court of India has finally come out with a Comprehensive Code on Ship Recycling and gazetted the same and thus it has become law.

In enacting this code, the industry has achieved following major things:
  • For the first time, the Cash Buyer has been defined in the Code - “the person or company who owns the ships for less than six months.”
  • The Code also safeguards the Indian ship recycler from Maritime Lien risk by providing a clause “8.3.11 - A ship delivered physically for recycling purpose shall not be subject to any claims or maritime lien arising against any former owner of the ship.”
  • Stricter implementation of the Code particularly in respect of removal of oil pipe line by cold cutting in place of hot cutting will greatly secure the safety of workers.
  • A model ship breaking yard has to be provided.
  • Verification of ownership of the ship as per Code should be strictly implemented.
Hong Kong Convention
The industry had represented to the government not to ratify the Convention. Even in the meeting of representatives of Ship Recycling associations of India, Pakistan and Bangladesh, it was decided not to ratify the convention. Industry’s main opposition to the convention is that the Convention is only meant for ship breakers and it is not covering the role of ship owners except for giving inventory.

With the enactment of Code on Ship Recycling by the Indian government, the Hong Kong Convention has not got much value for India. Although the Convention has been adopted in 2009, according to my information, no country other than Norway has ratified it so far. In my opinion India should not ratify it. Even if it is ratified, Indian industry will not be impacted as most of the ships are going to be imported through cash buyers from countries who have not ratified the Convention.

Basel Convention
According to Basel Convention, ship is declared as hazardous waste. Luckily for us, Environment Ministry of Govt of India has not accepted this. They have clarified that we will follow the Supreme Court order and not the Basel Convention.

EU Regulations
As per their earlier regulation of 2006, they had accepted ship as hazardous waste. They had acknowledged that this regulation is circumvented by selling ships through intermediaries. So to get rid of the Basel Convention and dilute their earlier regulation, they have come out with the new regulation. It is agreed that it is their sovereign right to make their own regulation. This regulation necessitates (1) the ship breaker to register with EU (2) the ship breaker should have a ship recycling plan and ship facility management plan to be got approved from the ship owners and (3) that the ship breaker be approved by the EU.

There are a few good features of the new regulations such as: (1) The regulation accepts the ship going for demolition should have gas-free for hot work; (2) If the ship is sold within 6 months to a non-registered party, the seller will be penalised. But, here there is a loophole in the explanation, but I am not able to state exactly how it will be exploited by the unscrupulous traders.

I understand that the EU has started implementing the above regulation and with the result recently a ship owner was forced to sell a ship to Turkish ship recycling yard at a price almost USD 100 per ldt less as compared to price fetched by selling it to Asian yards. Turkey converts ships into melting scrap and not Re-rollable scrap. Thus it will be the ship owners who will be feeling the pinch by losing millions of dollars. Asian countries will get lesser number of ships from EU countries as most of the ships from the region will get diverted to Turkey. Here it should be the EU ship owners who should be fighting against the EU regulations rather than Asian ship breakers.

Quality Control Order under BIS Act
This order has already become law. The immediate impact of this law has been that demand for Re-rollable scrap has been reduced due to the gap in price of melting scrap and Re-rollable scrap. However, we have achieved one thing under this order. That is, there is a market for non critical items, and its production and marketing is accepted.

The industry has strongly represented for separate tariff heading for Re-rollable scrap to produce non critical items. But, nothing is yet achieved. It requires further follow up. Otherwise, technically, billing of Re-rollable scrap under tariff heading 72.08 is a breach of BIS Act.

Internationally, mainly Turkey and China were India’s main competitors. It appears that, scrap based Re-rolling mills have been phased out in these countries. They are now buying ships only as equivalent to melting scrap. These countries are almost out of ship breaking business. I understand that China was forced to give a subsidy of USD140/ldt for local ships. At present ship breaking in China is restricted to local ships. India and Bangladesh have regulations for import of ships with gas free for hot work certification which regulation is not in Pakistan and therefore all tankers are now getting diverted to Pakistan.

Japanese Proposal
Japanese proposal is against the interest of Indian ship recycling whose economy is based on beaching method of ship recycling.

Indirectly, it is nothing but going for dry dock method of ship breaking.

- A PPP project will have monopoly and will exploit the individual ship breakers whose cost of breaking will go up. The uneconomic working will lead to the closure of the industry. If the industry is closed, GMB will not be able to recover any revenue from shipbreakers and the entire burden of repayment of loan will come on GMB.
  • Loan period is 30 years. Future of ship breaking scenario is uncertain and permission given by GMB is for 5-10 years. With that background, how to commit for a 30-year period of repayment? GMB has got a very bad example of soft loan to Pipavav Ship Breaking Yard.
  • The cost that would be incurred and to be borne for utilisation of the created facility will be exorbitant. We cannot even calculate exactly what will be the cost per tonne. It appears it may cost around Rs1 crore per ship. It will make India non-competitive against other ship recycling countries.
  • The assumption that due to dry docking facility, India will get cheaper ships is not going to be true in a scenario where ship owners want maximum price for ship and they are going to market the ships through cash buyer intermediaries where no laws are implemented.
  • It is seen that the dry dock project is being designed for 30 ships a year i.e. about 3 ships a month, as against about 350 ships which are being recycled at present at Alang.
Amendment to Merchant Shipping Act
The amendment of 6th August 2013 of the Merchant Shipping Act requires that all ships above 25 years old have to be insured by a P&I Club insurance company approved by DG Shipping only. This is with a view to avoid ship wreck in India ports. Therefore, it is in the interest of the country that this regulation is implemented strictly.

Proposed Admiralty Bill
In the industry’s representation to the Shipping Ministry, it had requested to have a clause to save the ship recyclers from Maritime Lien risk, in line with the Code. It is necessary to have this accepted by the Ministry as otherwise the contradiction between the Code and the Admiralty Bill will lead to the authorities following the 1994 International Convention putting the ship breakers in deep trouble.

Proposed Change of Administrative Control
I understand that due to problems faced by the Ministry in answering questions that come up in Parliament on the industry, the Steel Ministry has written to the Cabinet Secretary that they are not interested to be the Administrative Ministry for Ship breaking and that it should be transferred to Shipping Ministry. The industry has strongly objected to such transfer for these reasons:

  • In past, import of ship was canalised through the ministry;
  • Steel Ministry is the administrative ministry for this industry for the last over 30 years;
  • Import of ship is nothing but import of steel scrap;
  • FSC (Ferrous Scrap Committee) is controlled by Steel Ministry; and
  • The Chairman of IMC is the Jt. Secretary of Steel Ministry.

Although the industry’s views were as mentioned above, the Govt has now transferred the administrative control to Shipping Ministry. What is needed now is that the funds at the disposal of Ferrous Scrap Committee meant for the development of Ship Recycling and under the control Steel Ministry should also be transferred to Shiping Ministry.

JPC Study on Steel Scrap
JPC have decided to have a study on Indian steel market. The industry has represented for (1) introducing tariff heading for Re-rollable scrap, (2) amendment to the definition of melting scrap and Re-rollable scrap in BIS 2549 and (3) simplification of customs clearance procedure for import of steel scrap.

They have constituted a Core Committee to further study and make a report. The industry’s future may be affected if it does not represent it case properly before this Committee.

GMB Policy
A number of issues are pending with GMB such as:

  • Plot user policy has not been finalised since 2009 and the industry is operating by giving an undertaking that the new policy as and when finalised will be effective from 2009
  • Premium for clubbing of plots for making small to big and phasing out of small plots for the purpose of safety.
  • Avoiding overlapping activity.
  • Mergers and acquisitions is a common practice in any economic activity which is unduly restricted by GMB which needs correction.
  • Upgradation of training institute
  • Removal of petty traders from the yard
  • Trust Hospital - This trust is formed from money recovered from shipbreakers. It is defunct now. At present the trust is holding a building along with the land and a corpus of about Rs 65 lakhs. I strongly suggest that either the ship recyclers association or GMB should take over this trust.

Import of Left over Bunker in Ships
One of the main problems faced by the industry at present is regarding import of left over bunker in the form of HSD & LSD diesel oil. No ship can be beached for recycling without the left over bunker. Unfortunately, DGFT & Customs have raised this issue that diesel oil is a canalised item and cannot be imported. If this condition is strictly implemented, the industry will come to a standstill. At present the customs allow the ships with left over diesel oil and gas oil by charging fine and penalty. This is not a permanent solution to the problem.

Under previous Department Circular 37/96 which defines a ship and states that the bunker has to be separately charged as per tariff item meant for diesel oil and not under the tariff item for ships for demolition i.e. 89.08. In practice, this was cleared by charging custom duty on bunker at the tariff meant for oils and even today the industry is prepared for it. This is not a revenue oriented issue. Thus, there is a need for amendment to circular No.37/96 to cover charging of bunker in ships imported for breaking as otherwise the industry will sometime come to a grinding halt if the above restriction is strictly imposed.

Luckily, the Customs, Excise and Service Tax Appellate Tribunal has upheld the industry’s appeal in the matter.

RBI Relaxation in Respect of Payment for Import of Ships for Demolition

The recent RBI relaxation for payment in foreign currency for import of ships for recycling by Indian ship breakers will help the industry in competitive bidding for ships auctioned by Indian ship owners.

Conclusion
I must say that the industry at Alang has adopted the norm of Green Ship Recycling and things have changed dramatically to have an eco-friendly, worker safe, worker friendly and employment oriented industry. Construction for the first phase housing project for workers has also begun at Alang.

The only worrying thing is that the realisation from ship breaking has come down due to following factors:
  • Reduction in non-ferrous content
  • Substantial part of Re-rollable scrap now goes as melting scrap; as against a ratio of 85:15 between rerollable and melting before, it has now come down to 60:40 now.

Thus, there is some amount of uncertainty about the future of the industry.

(The views expressed by the Author are his personal views and not that of the industry or the association he represents.)