Recycling – where ships go to die

A ship’s life cycle ends with it being dismantled and recycled. Up to 95 % of a ship’s weight is made up of steel, which can be sold and reused. A modern ­recycling process, which also includes the recycling of other materials, can be very efficient and is a positive step towards a greener shipping industry.

Unfortunately, almost 90 % of all ships being scrapped are still disposed of in India, Bangladesh and Pakistan where the controversial beaching method is used. As the word implies, beaching involves steering the ship full steam ahead onto a beach to intentionally ground it. Manual dismantling then takes place using the local work force, a high number of whom are below the age of 18 and on very low wages. During this process, hazardous materials such as asbestos and PCB are sometimes released on to the beach and washed out to sea by tidal waters. Such materials are not only environmentally damaging but also dangerous for the workers on the beaching yards who breathe in hazardous materials as a result of lack of proper training and equipment. In addition, as a consequence of minimal security measures, beaching of ships and subsequent manual dismantling have in too many instances resulted in serious injuries or loss of life.

The use of beaching yards is a direct result of financial considerations; a ship owner can either sell the ship for three million euros to be scrapped on a beach, or the ship can be recycled at an environmentally friendly yard with the ship owner making next to nothing.

Because of the environmental and human rights issues that arise from the most common recycling method, a legal framework that deals with these issues was requested and has been developed by states and non-governmental organisations (NGO’s).

Relevant regulations

The Basel Convention and EWSR

Until recently, the main international legal framework for ship recycling consisted of the Basel Convention and the EU’s Waste Shipment Regulation, which apply to ship recycling to the extent it can be characterized as ‘export of waste’. In practice, this legal framework did little to improve environmental and safety standards in the ship recycling industry.

The Hong Kong Convention

The lack of success of the Basel Convention framework with respect to ship recycling spawned a regulatory process culminating in the Hong Kong Convention on Ship Recycling (the “Convention”) in 2009. 
The Convention follows a “cradle-to-grave” approach and includes requirements for shipbuilders, ship owners, and ship recycling facilities; it aims to reduce accidents, injuries and other adverse effects on human health and the environment caused by ship recycling.

The Convention requires newbuilds and ships already in service to carry a Certificate of Inventory of Hazardous Materials (“CIHM”) showing the location and quantities of hazardous materials on board, and for newbuilds specifically, certain hazardous materials will be forbidden when being constructed. The CIHM will be subject to periodical renewal surveys, and at the end of their service life, ships will have to undergo a final survey before receiving a Ready for Recycling Certificate.

In terms of the recycling facilities themselves, under the Convention they are required to produce a ship-specific Ship Recycling Plan and Statement of Completion before and after a ship is recycled. Ships subject to the Convention will only be allowed to be recycled in Convention member states, and each Convention member state will be responsible for approving ship ­recycling facilities in that state.

The Convention will enter into force two years after ratification by 15 states representing at least 40% of the world’s fleet by gross tonnage and combined ship recycling capacity, equal to at least 3% of their combined fleet. The Convention has so far been ratified by Belgium, Congo, Denmark, Norway, France, and Panama. There are indications that India, Turkey and Germany may ratify in the near future, however it is unlikely that the Convention will enter into force before 2020.

EU Ship Recycling Regulation

To help speed up the ratification process of the Convention, in 2013 the EU adopted the Ship Recycling Regulation (“ESRR”). The ESRR, which applies to vessels ­registered in EU states, implements the Convention at EU level but with some additional requirements.

The ESRR requires that ship-recycling facilities “operate from fixed structures”; demonstrate “control of any leakage, in particular in intertidal zones”; and ensure that handling of ­hazardous materials and waste generated during ­recycling occurs “on impermeable floors with effective draining ­systems”. These extra requirements are likely, therefore, to rule out beaching facilities. In addition, certain minimum IHM requirements will apply to non-EU flagged tonnage calling at EU ports.

The ESRR will apply fully by the end of 2018. As of May 2018 the list of approved EU ship recycling facilities consists of 21 facilities with a combined annual capacity of over 300,000 tons. A list of EU-approved third-country facilities was expected to be released by the end of 2017, but the approval process is still ongoing, creating some uncertainty as to whether there is sufficient recycling capacity for European-registered vessels.

Sanctions

Both the Convention and the ESRR will involve port-state ­control and will leave the details of the sanctions regime up to the individual member states. Accordingly, considerable ­variation in the strictness of enforcement and the size of the penalties for non-compliance should be expected.

Sea trade judgment

The intention of the mentioned regulations is to limit the environmental and human rights issues associated with the recycling of ships. A recent case law example from Rotterdam district court illustrates the problematic aspects of beaching which this regulation seeks to address. The case concerned prosecution of several companies and two executives in the Seatrade group for having planned and executed the recycling of ships in India, Bangladesh and Turkey in 2012 in breach of the EU Waste Shipment Regulation ((EC) No 1013/2006) on shipments of waste. The district court noted that “[i]t is ­common knowledge that beaching a ship and demolishing it at the spot pollutes water and air, while untrained workers lack the expertise to deal with dangerous materials’” and that these “practises cause multiple deaths each year”. Although only one of four vessels ended up being beached, the intention had been to have all four ships beached, and the companies and two ­executives were therefore held liable for fines ranging from EUR 10,000 to 750,000.

Conclusions and general observations

Although slow, the general direction of ship scrapping and recycling is moving towards reducing environmental ­damage and increasing standards for workers in yards situated in developing countries, particularly those of India, Bangladesh and Pakistan. Over the last few years it has become evident that tolerance among regulators and most recently the courts, is wearing thin. The Seatrade case will likely not be the last, with reportedly authorities in five European countries ­investigating similar cases as of the beginning of this year. Recent media attention has also put increased pressure on ship owners whom are likely to seek to avoid the potential commercial ­implications of being linked to beaching practices.

The effect on the industry is gradually visible at yards in South Asia, in particular Alang, India (the largest ship ­recycling centre in the world, recycling approximately half of the world fleet). Yards are upping their game and improving the conditions for scrapping; several yards have been approved by the Convention and more are going through the Statement of Compliance process. On a legislative level, the Bangladeshi parliament has passed a ship recycling bill whereby it aims to improve working conditions in its yards. This will, among other things, require the formation of a 14 member board which is to oversee ship recycling activities.

The increased focus on ship recycling has also had a ­positive effect in inspiring private initiatives that seek to increase ­scrapping transparency and standards through voluntary measures or commercial means. One such example is the Ship Recycling Transparency Initiative. The initiative, which was launched by ship owners, banks and charities on 7 March 2018 seeks to improve transparency in the global ship recycling industry. The initiative is aiming to facilitate the voluntary ­disclosure of recycling practices and related data by owners and to support the use of this information by cargo owners, investors and others to make better decisions. The initial ­signatories to the initiative reportedly include A.P. Moller Maersk, Hapag-Lloyd, Wallenius Wilhelmsen, The China Navigation Company and Norden; we understand the group are currently working to develop a common set of disclosure criteria and a user-friendly platform for information sharing.

Another example is the Responsible Ship Recycling Standards intiative (RSRS). The aim of the RSRS is to incorporate scrapping clauses in accordance with international standards such as the Hong Kong Convention, into loan agreements. These clauses also include an obligation for shipping companies to ensure that all ships carry a “Green Passport” that provides an overview of all the hazardous materials on board. A number of Nordic banks, such as Nordea, DNB, SEB and Export Credit Norway have signed up to the initiative. The initiative has met mixed responses from ship owners, and enforcement of the scrapping clauses has its ­challenges, particularly if a loan is repaid prior to the vessel being sold to a scrap buyer. Nevertheless, the initiative sends a clear signal to ship owners of what is expected of them, and exploiting legal loopholes may have negative commercial impacts if new funding is sought at a later stage.

Despite the ramping up of regulation and court exposure, many issues remains to be dealt with, such as the delayed publication of the non-EU listed yards under the ESRR. Some in the shipping industry have also expressed concern that the ESRR, with its anti-beach yard standpoint, may undo the improvements the Convention has led to in South Asian yards in ­particular. If these yards are excluded from the ESRR’s non-EU list, this will inevitably begin a shift away from beach yards, which are important for local economies, instead of improving working conditions at the yards themselves.

From an owners’ perspective, there is currently no real financial incentive to stay away from non-regulation compliant low standard yards. Re-flagging of EU flagged vessels is a common way of avoiding being captured by the ESRR and as it costs a very small fraction of the amount paid to owners for their ­vessels by the yards, it is clearly a route that is taken. However, recent examples show that arranged sale of vessels through scrap buyers while being aware that the vessel will be beached, is not accepted by European environmental and prosecuting authorities.

Ultimately, only time will tell what impact and changes will eventually be made once the Convention and ESRR are fully in force. However, owners and yards should be prepared for a shifting landscape with mandatory requirements for IHMs, surveys and plans in the not too distant future.

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