Tradewinds – Getting the capacity right

(Written by Bob Hurst)

10 April 2013 - In addition to environmental restrictions on building new facilities and importing scrap tonnage, the volume of scrapping in China is determined by supply and demand — but much more by ship supply than steel demand

Chinese shipbreaking was not always green. In the 1980s, the country still practised beaching and had more than 300 breakers’ yards.

“They were along the coast everywhere,” said China National Shiprecycling Association (CNSA) president Xie Dehua. Now there are only about 50 yards, much cleaner ones, with no beaching in use and with full facilities for receiving waste water and pollutants and higher safety requirements for workers. The great majority of them are along the Yangtze and Pearl rivers.

Some 21 of today’s total, including all licenced since 2008 and all that have permission to buy foreign tonnage, are members of Xie’s state-backed but voluntary association. The rest are smaller facilities and confine themselves to recycling Chinese domestic tonnage, which gives them plenty to do.

In addition to environmental restrictions on building of new facilities and importing of scrap tonnage, the volume of ship scrapping in China is determined by supply and demand, but much more by ship supply than steel demand, as rising or falling markets impel shipowners to hold on to old tonnage or dispose of it. At the demand end, on the other hand, steel production dwarfs the amount of available ship-sourced scrap.

During the strong shipping markets between 2005 and 2008, Chinese scrapyards only put through about 300,000 ldt per year as a rough average. Since the crash, the yearly total has been more like two million ldt, says Xie.

Thankfully for the industry he represents, Chinese steel mills mostly use scrap steel in combination with ore in the same production process, so scrap demand is a necessary component of steel production demand, not just for rolling mills.But scrap from demolished ships is only a fraction of total scrap.

Xie reckons scrap demand from China’s steelmakers currently runs at around 10 million tonnes a year, and since only around two million tonnes of that comes from ships (2.3 million ldt in 2012), there is room to absorb more tonnage and the CNSA is predicting that the proportion of scrap steel sourced from ships will rise. Most newer recycling yards have been built to around 200,000-ldt annual capacity, but local authorities regulate the total tonnage that a facility is permitted to import and process in a year.

“We always remind our members: Don’t expand your capacity too fast because it’s very expensive and if the market situation changes suddenly, you could be in big trouble,” explained Xie.

Potentially much bigger than the average, however, is the new Zhejiang Hongying scrapping facility on Daishan Island. On its website the yard advertises an annual capacity of 250,000 ldt but CNSA officials say the maximum capacity of their newest member could come to 800,000 to one million ldt by the time the facility is fully operational and fully licensed.

Import licence expected soon

An import licence for Zhejiang Hongying is expected to come through in time for scrapping of international tonnage to take place this year, but probably not at full capacity right away.

Xie estimates the cost of the investment in the new facility at around CNY 1bn ($161m).

A smaller new yard of less than 500,000-ldt capacity per year might cost between CNY 200m and CNY 300m to start up.

Some Chinese shipbuilding yards, challenged by weak demand, have looked at possible alternative uses for their underutilised facilities, including offshore work, shiprepair and shipbreaking.

But the CNSA president believes such a switch is not an easy one to make. Shipbuilders who have made enquiries with his association since 2008 about the costs of converting have gone away discouraged.

“Comparing shipbuilding and shiprecycling, they are very different processes with different standards,” said Xie. Facilities for separating and storing materials taken off vessels demand more space than an established shipyard would usually have at its disposal. Also, Chinese regulations do not permit shipbreaking facilities to be as close to residential areas as many shipbuilders’ facilities are. Local economic development plans may also specifically rule out shipbreaking.