In another move to control and prevent pollution, China the fourth largest shipbreaker in the world has decided to ban the demolition of foreign flagged vessels and offshore units at Chinese yards from 31-December, 2018. Chinese scrapyards will no doubt take a hit with competing South Asian being the main beneficiaries.
The 2019 ban will mean fewer demolition candidates for Chinese scrapyards, thereby translating into lower earnings. As a result we expect structural changes to take place in the Chinese scrapping market. We expect a less fragmented market with an exit of small scrap yards and a consolidation of existing players in a competition for survival.
Looking back nearly 66% of the total vessels scrapped at Chinese yards in 2017 were foreign flagged vessels. In other words, any such ban in 2017 would have left China with just 44 Chinese flagged vessels instead of the 128 vessels that were actually scrapped. Moreover, Chinese flagged vessels form only a small share of the global fleet. In fact, in the present fleet of merchant vessels more than 10,000 dwt and aged 20 years or more, only 3.7% fly a Chinese flag. As such, only low numbers of Chinese flag vessels are likely to be scrapped in the short term.
In the absence of Chinese scrapyards, owners of non-Chinese flagged vessels, which earlier parked their ageing vessels at Chinese scrapyards, will shift to yards in South Asia. India tops the list of demolition locations, with about 27% of global scrappings going to Indian yards, followed by Bangladesh and Pakistan; at 20% and 11% respectively.
Meanwhile the ban is unlikely to cause any real hardship to Chinese ship owners as more than 90% of Chinese flagged vessels have been demolished at Chinese scrapyards since 2014. The ban will follow a three year long scrap and build policy, which provides local shipowners with a subsidy of $120 per gross tonne for ships recycled at local yards, which has meant that more than 90% of Chinese flagged ships scrapped in the last four years have gone to local breakers.