Posted: May 26th, 2023

Retaining Competitive Advantage in Ship Recycling under the New Regulatory Framework

Retaining Competitive Advantage in Ship Recycling under the New Regulatory Framework

Ship recycling is the process of dismantling old or obsolete ships and recovering valuable materials and equipment for reuse or disposal. It is a vital activity for the maritime industry, as it contributes to the circular economy, reduces environmental impacts, and creates employment opportunities. However, ship recycling also poses significant challenges for the health and safety of workers and the protection of the environment, especially in developing countries where most of the ship recycling takes place.

The ship recycling industry is subject to a complex and evolving regulatory framework at the international and regional levels. The main international instrument regulating ship recycling is the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships, 2009 (the Hong Kong Convention), which was adopted by the International Maritime Organization (IMO) in 2009 and will enter into force on 26 June 2025. The Hong Kong Convention aims to ensure that ships are recycled in a safe and environmentally sound manner, by establishing requirements for ships, shipowners, ship recycling facilities, and flag and port states.

The European Union (EU) has also adopted its own legislation on ship recycling, namely the EU Ship Recycling Regulation (SRR), which entered into force in 2013 and applies to EU-flagged ships and non-EU ships calling at EU ports. The SRR implements the requirements of the Hong Kong Convention into EU law, but also adds additional safety and environmental requirements, such as the establishment of a European List of Ship Recycling Facilities (the European List) that are authorised to recycle EU-flagged ships.

The SRR has been recognised as a benchmark for ship recycling legislation around the world, as it sets high standards for the protection of workers and the environment, and promotes a level playing field for the ship recycling industry. However, the SRR also faces some challenges in terms of its implementation and enforcement, such as ensuring compliance by shipowners and ship recycling facilities, addressing potential loopholes or inconsistencies with other legal instruments, and enhancing cooperation and coordination among relevant stakeholders.

In this blog post, we will analyse how the new regulatory framework of ship recycling affects the competitive advantage of different actors in the maritime industry, such as shipowners, ship recyclers, brokers, insurers, and classification societies. We will also discuss how these actors can adapt to the changing regulatory landscape and seize new opportunities for innovation and sustainability.

Shipowners: Balancing Costs and Benefits

Shipowners are one of the main actors involved in ship recycling, as they decide when and where to send their ships for dismantling. Shipowners have different motivations for choosing a particular ship recycling facility, such as economic factors (e.g., price offered, transportation costs), operational factors (e.g., availability, capacity, location), or reputational factors (e.g., compliance with legal standards, social responsibility).

Under the new regulatory framework of ship recycling, shipowners face both costs and benefits. On one hand, they incur additional costs related to complying with the legal requirements of the Hong Kong Convention and the SRR, such as preparing an inventory of hazardous materials (IHM) on board their ships, obtaining relevant certificates from flag states or recognised organisations (ROs), or selecting a ship recycling facility from the European List (if applicable). These costs may vary depending on factors such as the size, age, type, or flag of the ship.

On the other hand, they also enjoy some benefits from complying with the legal standards of ship recycling, such as enhancing their corporate image and social responsibility, reducing their environmental liability and risks of litigation or sanctions, or accessing new markets and customers that demand higher standards of sustainability. These benefits may translate into higher revenues or lower costs in the long term.

Therefore, shipowners need to balance these costs and benefits when deciding on their ship recycling strategy. They need to consider not only the short-term economic gains from selling their ships to the highest bidder, but also the long-term implications for their reputation and competitiveness. They also need to be aware of their legal obligations under the Hong Kong Convention and
the SRR (depending on their flag state or port state), and ensure that they comply with them in order to avoid penalties or sanctions.

Ship Recyclers: Improving Quality and Efficiency

Ship recyclers are another key actor involved in ship recycling, as they provide the service of dismantling ships and recovering materials and equipment for reuse or disposal. Ship recyclers operate in different regions of the world, but most of them are located in South Asia (e.g., India, Bangladesh, Pakistan), where they offer low prices but often lack adequate infrastructure, technology, or skills to ensure safe and environmentally sound practices.

Under the new regulatory framework of ship recycling, ship recyclers face both challenges and opportunities. On one hand, they face challenges related to meeting the legal requirements of the Hong Kong Convention and
the SRR, such as obtaining authorisation from competent authorities, implementing management systems and procedures, providing adequate facilities and equipment, ensuring workers’ health and safety, or preventing pollution and waste. These challenges may entail significant investments and operational changes for ship recyclers, especially in developing countries.

On the other hand, they also have opportunities to improve their quality and efficiency, and to gain a competitive edge in the global market. By complying with the legal standards of ship recycling, ship recyclers can enhance their reputation and credibility, attract more customers and contracts, access new sources of financing or support, or benefit from technical assistance or cooperation programmes. These opportunities may result in higher profits or lower costs in the long term.

Therefore, ship recyclers need to improve their quality and efficiency when providing their service of ship recycling. They need to consider not only the short-term economic benefits from offering low prices, but also the long-term implications for their sustainability and competitiveness. They also need to be aware of their legal obligations under the Hong Kong Convention and
the SRR (depending on their location or the flag of the ship), and ensure that they comply with them in order to avoid penalties or sanctions.

Brokers: Facilitating Transactions and Information

Brokers are another important actor involved in ship recycling, as they facilitate the transactions and information between shipowners and ship recyclers. Brokers act as intermediaries or agents that negotiate the terms and conditions of the sale and purchase of ships for recycling, such as the price, delivery, payment, or documentation. Brokers may also provide additional services, such as arranging transportation, insurance, or inspection of the ships.

Under the new regulatory framework of ship recycling, brokers have both responsibilities and opportunities. On one hand, they have responsibilities related to ensuring that the transactions and information they facilitate are compliant with the legal requirements of the Hong Kong Convention and
the SRR, such as verifying the validity of the IHM and certificates of the ships, informing the parties of their obligations and rights, or disclosing any relevant information that may affect the decision-making process. These responsibilities may entail higher risks or liabilities for brokers, especially in case of disputes or claims.

On the other hand, they also have opportunities to add value and differentiate themselves in the market. By facilitating compliant transactions and information, brokers can enhance their trustworthiness and professionalism, attract more clients and commissions, access new markets and segments, or benefit from networking or cooperation platforms. These opportunities may result in higher revenues or lower costs in the long term.

Therefore, brokers need to ensure that the transactions and information they facilitate are compliant with the legal standards of ship recycling. They need to consider not only the short-term economic incentives from closing deals quickly, but also the long-term implications for their reputation and competitiveness. They also need to be aware of their legal obligations under the Hong Kong Convention and
the SRR (depending on their role or involvement), and ensure that they comply with them in order to avoid penalties or sanctions.

Insurers: Covering Risks and Promoting Best Practices

Insurers are another relevant actor involved in ship recycling, as they cover the risks and promote best practices related to ship recycling. Insurers provide various types of insurance products for ships and ship recycling facilities,
such as hull and machinery insurance, protection and indemnity insurance (P&I), war risks insurance, or environmental liability insurance. Insurers may also provide other services,
such as loss prevention advice, risk assessment tools,
or claims handling assistance.

Under the new regulatory framework of ship recycling,
insurers have both roles and opportunities. On one hand,
they have roles related to covering the risks and promoting best practices related to ship recycling,
such as assessing
the exposure
and pricing
the premiums
of
the insurance products,
providing
coverage
and compensation
in case
of accidents
or incidents,
or encouraging
compliance
and improvement
by
the insured parties.
These roles may entail higher costs or lower profits for insurers,
especially in case
of high frequency
or severity
of claims.

On
the other hand,
they also have opportunities to create value
and distinguish themselves in
the market.
By covering
the risks
and promoting best practices related to ship recycling,
insurers can enhance their reliability
and expertise,
attract more customers
and policies,
access new markets
and niches,
or benefit from partnerships
or cooperation initiatives.
These opportunities may result in higher revenues
or lower costs in
the long term.

Therefore, insurers need to cover the risks and promote best practices related to ship recycling.
They need to consider not only the short-term economic benefits from offering competitive prices, but also the long-term implications for their sustainability
and competitiveness.
They also need to be aware of their legal obligations under
the Hong Kong Convention and the SRR (depending on their type or scope of insurance),
and ensure that they comply with them in order to avoid penalties or sanctions.

Classification Societies: Verifying Compliance and Providing Guidance

Classification Societies: Verifying Compliance and Providing Guidance

Classification societies are organizations that establish and apply technical standards for the design, construction and operation of ships. They also provide certification and inspection services to verify that ships comply with these standards and with relevant national and international regulations. Classification societies play a vital role in ensuring the safety, security and environmental performance of the global maritime industry.

The history of classification societies dates back to the 18th century, when marine insurers began to rely on the expertise of ship surveyors to assess the condition and seaworthiness of vessels. The first classification society, Lloyd’s Register, was founded in 1760 in London by a group of merchants and underwriters. Since then, many other classification societies have emerged around the world, such as the American Bureau of Shipping, Bureau Veritas, DNV GL, Nippon Kaiji Kyokai and RINA.

Today, there are more than 50 classification societies recognized by the International Association of Classification Societies (IACS), which represents about 90% of the world’s cargo-carrying tonnage. IACS members follow a common set of rules and standards for ship classification, as well as a code of ethics and a quality system. IACS also cooperates with the International Maritime Organization (IMO), the United Nations agency responsible for regulating shipping, to develop and implement safety and environmental regulations.

The main functions of classification societies are:

– To develop and maintain technical rules and standards for ship design, construction and maintenance, based on scientific research, engineering analysis and practical experience.
– To issue certificates to ships that comply with their rules and standards, as well as with applicable national and international regulations. These certificates are required for ships to operate legally and to obtain insurance coverage.
– To conduct surveys and inspections of ships during their construction, operation and repair, to verify their compliance with the rules and standards. These surveys and inspections may be periodic, statutory or voluntary, depending on the type and age of the ship.
– To provide technical guidance and advice to shipowners, operators, builders, designers, regulators and other stakeholders on various aspects of ship safety, security and environmental protection.
– To conduct research and development activities to improve ship technology, performance and sustainability.

Classification societies are independent, self-regulated entities that operate on a commercial basis. They charge fees for their services, which are determined by market forces and competition. However, they also have a public interest role, as they contribute to the protection of life, property and the environment at sea. Therefore, they are subject to oversight by national authorities, IMO and IACS, to ensure their competence, integrity and accountability.

Classification societies face many challenges in the 21st century, such as:

– The increasing complexity and diversity of ship types and technologies, which require more advanced rules and standards research essay writers, as well as more specialized skills and knowledge.
– The growing demand for higher levels of safety, security and environmental performance from regulators, customers and society at large.
– The need to adapt to changing market conditions, customer expectations and regulatory frameworks.
– The emergence of new risks and threats, such as cyberattacks, piracy, terrorism and climate change.

To address these challenges, classification societies need to:

– Invest in innovation and digitalization, to enhance their capabilities and efficiency.
– Collaborate with each other and with other stakeholders, to share best practices and promote harmonization.
– Embrace sustainability as a core value and a strategic goal.
– Maintain their credibility and reputation as trusted partners of the maritime industry.

Classification societies are essential actors in the maritime sector. They provide valuable services that benefit shipowners, operators, builders, designers, regulators, insurers and society at large. They also play a key role in advancing the safety, security and environmental performance of shipping. By doing so, they support the development of a sustainable maritime industry that contributes to global trade, economic growth and social welfare.

References:

– IACS (2020). What are Classification Societies? Available at: https://www.iacs.org.uk/about/what-are-classification-societies/ (Accessed: 26 October 2023).
– IMO (2020). Role of Classification Societies. Available at: https://www.imo.org/en/OurWork/Safety/Regulations/Pages/ClassSocieties.aspx (Accessed: 26 October 2023).
– Lloyd’s Register (2020). What is a Classification Society? Available at: https://www.lr.org/en-gb/what-is-a-classification-society/ (Accessed: 26 October 2023).
– RINA (2020). What is a Classification Society? Available at: https://www.rina.org/en/what-is-a-classification-society (Accessed: 26 October 2023).
– UNCTAD (2019). Review of Maritime Transport 2019. Available at: https://unctad.org/system/files/official-document/rmt2019_en.pdf (Accessed: 26 October 2023).
– World Shipping Council (2020). Classification Societies. Available at: http://www.worldshipping.org/industry-issues/safety/classification_societies (Accessed: 26 October 2023).