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Published on February 23rd, 2017

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Dis-incentivize Cash Buyers to Scrap Ships at Bad Yards’, Says Maersk

More than a year after the iconic Danish firm Maersk Line took the plunge to come to Alang, most of the large ship owners who swear by responsible polices are yet to start sending their older tonnage to one of the green facilities located there.

This smacks of double standards, says industry sources, because these large companies take pride in saying that they will never send their ships to Alang but get them scrapped in China and Turkey. But, these are the companies who also just sell off their vessels at the end of their lives to cash buyers which end up being taken apart at plots, even in Alang, that follow bad practices.

This is bound to happen when large ship owners don’t put any requirements while selling ships to cash buyers to ensure scrapping at plots that follow quality standards. As a result, demolition-bound vessels often land-up in bad yards because the cash buyer simply looks at the yard that offers the best price regardless of whether it is a quality yard or not.

It is important to tackle this problem, says industry sources, when old vessels are sold off and nobody is caring about them. “That’s the root cause of the problem – shipping companies are not taking responsibility for the vessels that they have owned for the majority of their lifetime,” the industry expert said.

It’s no surprise then that despite the majority of large ship owners having corporate social responsibility (CSR) programs in place, still about 75 per cent of the older tonnage are scrapped at sub-standard yard facilities. There is a disconnect here; something does not add up.

“We have to dis-incentivize cash buyers to scrap vessels at bad yards. The cash buyer is typically a trader who just looks at where he can get the best price for the vessel. So, we have to take the financial incentive out of scrapping at bad yards,” says Annette Stube, head of sustainability, Maesk Transport & Logistics, during a visit to India on 19 January.

To address this issue, Maersk has suggested a formula.

“The only way to do that is to say, within the next two years, we can’t take responsibility for the entire lifetime, if the residual value of the vessel is between 25 and 40 per cent above the best scrap price, then, if you (cash buyer) want to scrap it, you (cash buyer) have to scrap it at our standards or you (cash buyer) have to re-deploy it for two years” Stube said.

“Otherwise, you (cash buyer) have to pay us a fine of 33 per cent of the residual value. So, you always have to have this residual value in mind. If the vessel’s residual value is more than 40 per cent above the best scrap price, then the cash buyer will not be interested in scrapping because there would be more money in redeploying it. If it is less than 25 per cent above the best scrap price, Maersk will keep the vessel and scrap it according to our standards. We will never sell vessels that have less than 25 per cent of the residual value above the best scrap price. This is reflected in the contract with the cash buyer. We are following it; we would like others to follow it”, she said.

Maersk

In 2016, Maersk Line picked Alang to launch a development program to upgrade some of the plots that had won compliance certificates with the Hong Kong Convention of the IMO to its own higher responsible ship recycling standards.

After auditing plot number 78 run by the Shree Ram Group, Maersk sent two ships – Georgia and Wyoming – for recycling there in April-May last year. And, while they were broken-up, Maersk supported Shree Ram in attaining even higher quality standards.

The benefits inherent in this exercise goaded more plots to upgrade standards. A new tender issued by Maersk in October 2016, inviting quotations to recycle four more ships, saw a race to the top with yards competing not only on price but also on standards because they knew that those were the two parameters for getting the vessels.

Of the four vessels, two would be recycled at a new plot of Shree Ram and another two at the facility of Y S Investments.

The two plots of Shree Ram and the one run by Y S Investments have received the Hong Kong compliance certificates from Japanese class society ClassNK.

Altogether, 24 plots at Alang are now compliant with the Hong Kong Convention. Of these, 7 are certified by ClassNK, 13 by Italian Class society RINA and 4 by Indian class society IRClass.

“It’s absolutely pivotal that more ship owners go there and make the same requirements on quality standards because, otherwise, it’ s too little. You have to have a critical mass to make the program succeed,” Stube said.
Many other ship owners including CMA-CGM declined to be interviewed for the article.

India’s shipping ministry is backing the HKC, saying that it was working towards ratifying the IMO Convention sometime this year.

“We can’t do it alone. So, we have to think hard about how we can convince others to come to Alang. it’s not enough to hold round tables with other ship owners. For us, the cost is higher, the risk exposure has now gone up. Why would we make this decision honestly as a shipping company if you don’t have the values to do it. So, we have to find new ways of pushing others so that everybody can take responsibility for this industry that they are part of ,” Stube said.

“We have no evidence whether ship owners use Alang or not,” says Leslea Petersen, Manager, Communications at BIMCO, the world’s largest international shipping association with more than 2,200 members.

“We acknowledge that Alang has been improving the standards to be in accordance with the Hong Kong Convention and we commend this effort. BIMCO supports the Hong Kong Convention and we guide our members through the standard contract RECYCLECON which is a contract for the recycling of a ship,” Petersen adds.

‘The vessel is sold for recycling only and the buyers undertake and warrant that the vessel will be recycled at the ship recycling facility in accordance with the Ship Recycling Facility Plan and the Ship Recycling Plan,’ according to a RECYCLECON clause.

“The industry as a whole, needs to support the compliant yards, those working towards compliance and the HKC itself to help foster continued improvement,” says Dr Hiremath at GMS. “That means, ship owners need to take advantage of green recycling services and make responsible recycling the norm across the industry rather than the exception”, Dr Hiremath added.

Maersk is holding round tables and discussions with other owners and stake holders to get them around to what it is doing. As the next step, Maersk will soon launch a new website under its banner which would focus only on ship recycling. “There, we are putting out a lot of data, all about what we are doing and why we are doing it, the numbers and everything so that people can make up their own mind, if they think it’s right or wrong”.

The Shree Ram yard, according to Maersk Line, has “by far exceeded our expectations and they have even done things way beyond what we have asked them to do because they just saw the benefit of doing it”. “The gaps that are still there are those we find in our own industry; within our own business that most large companies will experience, which is more to do with the safety mind set. All the gear and equipment, training are in place, but actually getting workers to have safety mindset hundred per cent of the time is something that we are working on, on a daily basis not only in all our businesses but also at Shree Ram,” Stube said.

“It’s challenging because most of them are migrant workers; you have new groups of people coming frequently and they have to start all over; that’s just a challenge of this particular industry”, she noted.

Referring to criticism from watchdogs that the firm was not following its own recycling standards, Maersk says that it’s involvement in Alang was a work in progress.

“We knew in the initial period there is going to be some holes; that’s why we are doing it. And, we are doing exactly what we are promising, it’s a development project,” Stube adds.

Despite being a lone ranger thus far, Maersk says that it will not turn its back on Alang.

“We are in it for the long run, that’s the commitment we have. You can see that in the kind of program we are setting up, the people we are engaging there and deploying there. For instance, Maersk has just hired a new corporate social responsibility (CSR) manager who will look into the wider aspect of the Alang community such as hospitals, housing and other things”, Stube says.

“It’s not just a short- term thing for us, we knew from the beginning that this will take a long time. But, we hoped it wouldn’t be so lonely. This is doing our bit to change the industry and we believe that Alang has the best chance of getting there first by far,” she says.

Stube feels it’s a great opportunity for Alang and for India in this space. “We are committed to develop things in Alang, we believe it’s the right thing to do; the right way to change things is by engaging”.

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