Econometric analysis of the ship demolition market
The topic of ship recycling has obtained considerable attention during the last two decades for a variety of reasons with the likelihoodof the adoption of a new international convention under the auspices of the International Maritime Organization (IMO). This studyapplies econometric modeling to a unique data set to provide insight into the dynamics of the ship recycling market. The data setcontains information on 51,112 ships over 100gt and includes 748,621 events over a period of 29 years. The analysis conﬁrms a negativerelationship of earnings and a positive relationship of scrap prices for all locations while Bangladesh seems to be more sensitive tochanges in earnings than the other locations and more likely demolishes larger and older vessels. The results for ﬂag and ownership varyacross scrapping locations with Malta and Cyprus indicating potential importance from a registry perspective. The overall safety proﬁleof a vessel seems to be less important towards the probability of a ship being scrapped. Possible implementation of the convention at EUlevel will mostly likely affect Turkey while non-ratiﬁcation of one of the major ﬂags will most likely affect China or Bangladesh.
2008 Elsevier Ltd. All rights reserved.
Recycling of ships; Ship scrapping; Ship demolition; Probability of scrapping; International convention on ship recycling; Econometricmodeling; Binary logistic regression
The regulation of demolition of ships has developed intoa new topic of interest for the International MaritimeOrganization (IMO) due to focused attention of environ-mental advocates and human rights activists besidesimportant economic interests of member states and policymakers, engrossed in ‘‘greening’’ maritime operations andending unsafe labor practices. The Marine EnvironmentProtection Committee (MEPC) of IMO was thereforerequested to develop a new legally binding instrument onship recycling. The key objective of the new conventionwhich is planned for adoption by 2009 and is expectedto come into force by 2012 is expected to address theenvironmental, occupational health and safety risks relatedto ship recycling, taking into account the particularcharacteristics of world maritime transport.At regional level, the European Commission  haslaunched a Green Paper on ship dismantling in May 2007in order to prepare the ground for future action in thecontext of EU policies. The aim of the Green Paper is theprotection of the environment and human health ratherthan proposing the reinforcement of ship recycling volumesin the EU, which would carry the risk of deprivingcountries in South Asia of a major source of revenue.The situation merits econometric analyses since little isknown about the market dynamics of the current shipdemolition market. In addition, it is expected that somemajor ship recycling nations and ﬂag states will notimmediately sign and ratify the convention, which maylead to the development of two different ship recyclingmarkets operating in parallel. Whereas one market willcover the convention ships that are recycled in facilitiesthat comply with the convention’s standards of safe andenvironmentally sound recycling, a separate market for
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2008 Elsevier Ltd. All rights reserved.doi:10.1016/j.marpol.2008.02.004
Corresponding author. Tel.: +351911999663; fax: +31104089162.
firstname.lastname@example.org, email@example.com (S. Knapp),firstname.lastname@example.org (S.N. Kumar),email@example.com (A.B. Remijn).
The report and related ﬁndings discussed in this paper do not reﬂect theview of the United States Maritime Administration and the EuropeanMaritime Safety Agency.Please cite this article as: Knapp S, et al. Econometric analysis of the ship demolition market. Marine Policy (2008), doi:10.1016/j.marpol.2008.02.004
recycling non-party ships in facilities operating in Stateswhich are not a party to the convention. Prevailing marketdynamics and corporate social responsibility trends willdetermine how these two markets will develop and co-exist.Veldeler  touches upon the topic of value chainresponsibility of shipping companies in the context of industry conditions and the necessary changes needed totransform ship recycling into a vital service provider.ECORYS Transport  raises the possibility of establish-ing a ship recycling fund. Mikelis  presents a timely andhighly informative statistical overview of ship recycling andemphasizes some of the key economic relationships in theship recycling market such as a possible correlationbetween freight rates and ship recycling prices and theimpact of other aspects such as local labor costs and thedemand for scrap steel. The European Commission study on ship dismantling and pre-cleaning of ships of June2007 addressed the status and projections for Europeanend of life ships until 2020.In general, other than the above contributions, noeconometric analysis has been performed to explain thedynamics of the demolition market. The objective of thisarticle is therefore to apply econometric modeling to testsome of the relationships hypothesized by Mikelis  besidestrying to explain some of the dynamics of the demolitionmarket. It uses the probability of a ship being scrapped in acertain country to provide better insight into the dynamicsof the ship scrapping market. The study is based on a uniqueand comprehensive data set that combines information frommultiple data sources such as changes in ship particularsover time of ownership, registry, and classiﬁcation societyand integrates them with the results of safety inspections(port state control, ﬂag state inspections and industry-basedvetting inspections) changes in shipping market conditionsand ship scrapping information.The outcome of the analysis can beneﬁt the ongoingmultilateral discussions at IMO since it can help clarify theproposed convention’s impact on the ship recycling marketand its effectiveness in improving standards for shiprecycling worldwide. The article is structured as follows:Section 2 provides some insight into the ship demolitionmarket in order to provide some basic understanding of themain demolition countries. Section 3 describes the con-struction of the data set used for the econometric analysiswhile Section 4 presents the models used for the construc-tion of the probability of scrapping and provides theinterpretation and visualization of the results. The con-cluding section, Section 5, summarizes main ﬁndings of thestudy and its potential contributions to any dialog on shiprecycling in future years.
2. Economic overview of the shipping markets
For this analysis, the shipping markets as deﬁned byStopford  are taken into consideration such as the freightmarket, the second-hand market, the new-building marketand the demolition market. In general, the shippingmarkets have been particularly robust during the pastfew years in all segments compared to the 1980s and 1990s.The impetus for this development can be traced to the1990s liberalization of global trade and China’s entry intothe World Trade Organization both of which led to a ﬂurryof trade activities. One could easily argue that innovationsin the shipping industry have greatly lowered the landedcost of goods in target markets thereby directly facilitatingincreased globalization. The interdependency betweenglobal commerce and the merchant marine sector hasnever been so transparent as today .With ship utilization rates reaching unprecedented levels,ship-owners were left searching for new tonnage toaccommodate the rising demand for bulk carriers, tankersand large container ships. Thus the prolonged overallboom in shipping has had a profound impact on theshipbuilding sector as well as the market for second handships. While the fully booked shipyards put pressure onnew-building prices which have escalated, going up by 17%in 2006 alone , the increase in steel price and the declineof the US dollar have also contributed toward theescalation in shipbuilding prices and second hand prices.The market responded to these conditions by reactivatingidle capacity and building new yards. Non-traditional newshipbuilding nations have emerged on the scene such asChina, India and Vietnam.During the past decade, the cost of acquiring goodsecond hand ships has multiplied by a factor of 2 to 3 .Understandably, ship-owners have cut back their shipscrapping plans drastically and opted to prolong thecommercial use of older tonnage.Many factors drive the market for scrapping ships. Thesupply of ships for demolition is mostly a function of thefreight market conditions, the type and age of the ship, andcurrent and anticipated regulations. The market demand isa direct function of the price of steel and the costsassociated with the scrapping activity itself. Fig. 1 showsthe apparent world demand for steel from 2000 to 2006.The annual worldwide consumption of steel has increasedby 47% during this period with China emerging as themost dominant consumer.As an example of the magnitude of China’s importancein this market, in 2000, the EU block and the NAFTA
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EU NAFTA China Rest of World
Fig. 1. Apparent world steel use, 2000–2006 (in million metric tons).
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2Please cite this article as: Knapp S, et al. Econometric analysis of the ship demolition market. Marine Policy (2008), doi:10.1016/j.marpol.2008.02.004
block of nations were the two largest consumers of steelfollowed by China. By 2006, the annual use of steel inChina had tripled from its 2000 level and surpassed thetotal steel used in both EU and NAFTA nationscollectively. The price of steel, buoyed primarily by theChinese demand, has remained understandably very highin the new millennium and correspondingly, the price forscrap iron recycled from demolished ships.The main ship recycling nations today which are alsorepresented in the data set are India, Bangladesh, China,Pakistan and Turkey. It is difﬁcult to obtain accurate dataon the scrapping location and scrap prices of ships. Inorder to create the best possible combination of data forthis analysis, information from Lloyd’s Register Fairplay,Lloyd’s Maritime Intelligence Unit, and Clarkson’s wascombined. Table 1 provides some descriptive statistics of the data used in the analysis and despite combining threedata sources; the demolition location remains unknown forone out of every ﬁve ships. India dominated the marketduring the period, scrapping one out of every three shipsfollowed by Bangladesh with 16% and China with 12%.Table 1 further provides an overview of the mean age,gross tonnage and scrapping price per lightship ton (LTD)for the years 2000–2007. GRT is used in the table instead of LTD asthis information wasnot known for all observations.One can see that the average age of ships scrapped inBangladeshisthe highestfollowed by those scrappedin Indiaand Turkey. Ship scrapping prices have escalated consider-ably in particular after 2003, showing a perfect correspon-dence with the freight market boom discussed earlier. Thenext section will explain the combination of data set andvariables, which are used in the econometric analysis.
3. Combination of data set and variables used in analysis
The combination of data sets reﬂects the holisticapproach used in this analysis. This provides a robustand thoroughly comprehensive picture of ships and theirrelevance for the recycling market. The combination of theused data sets is based on an extension of a data set byKnapp and Franses  and can be divided into ﬁve areas asfollows:1.
such as earnings ($ per day), second handprices ($ per DWT) and new-building prices ($ perDWT) representing the shipping cycles.2.
such as location and price ($ per LTD)to reﬂect the demolition market.3.
Changes in ship particulars
data over time (ownership,ﬂag, classiﬁcation society, DoC company) to representthe basic ship risk proﬁle.4.
Ship safety inspection
data from port state control, ﬂagstate inspections, vetting inspections and ISM auditsrepresenting the safety management of the vessel.5.
to reﬂect historic safety performance.The data set contains information on 51,112 ships over100gt and includes 748,621 events over a 29-year period(1978–2007). Out of the total vessels in the database 4090were scrapped. The data sources that provide informationon changes in ship particulars such as ownership and ﬂagare from Lloyd’s Register Fairplay and RightShip andwere matched with data from Lloyd’s Maritime Intelli-gence Unit and Clarkson’s Shipping Intelligence Network.In addition, six port state control regimes (Paris Memor-andum of Understanding (MoU), Caribbean MoU, IndianOcean MoU, Vin ˜a del Mar Agreement on Port StateControl, United States Coast Guard and the AustralianMaritime Safety Authority (AMSA)) provided data onship safety inspections. From the industry vetting inspec-tions, data from the Chemical Distribution Institute (CDI)for chemical tankers, the Oil Companies InternationalMarine Forum (OCIMF)
for oil and chemical tankers,
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Table 1Mean age, tonnage and scrap price per scrapping location (1978–2007)Scrapping location Age GRT % Total scrapped Average scrap prices in $/LTD2000 2001 2002 2003 2004 2005 2006 2007Africa and Middle East 14.1 7312 0.34% 164 164 152 194 371 345 319 n/aBangladesh 26.7 31094 16.01% 163 185 166 194 343 389 353 443China 25 29372 11.98% 137 151 140 183 260 258 247 253Europe 20.7 5160 3.01% 156 168 135 194 268 338 319 371India 25.9 16524 33.37% 152 167 147 198 290 371 348 434North Am. and Paciﬁc 25.5 8615 0.76% 148 259 152 194 268 338 319 n/aOther Asia 15.9 7927 5.38% 131 150 128 195 261 298 226 245Pakistan 24.9 26501 3.20% 155 159 141 170 237 263 300 355South and Centr. America 21.9 11042 0.73% n/a 168 181 194 268 338 319 400Turkey 25.9 7034 4.72% 202 158 166 105 202 376 200 400Unknown 15.3 11320 20.49% 163 166 161 202 241 313 310 362Average 22 14718 100% 157 172 152 184 274 330 296 363
: % to total vessels scrapped in data set, for $/ltd, the year 2007 ends in October
The database system of OCIMF is called SIRE, which is used in thisarticle to denote the data source.
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3Please cite this article as: Knapp S, et al. Econometric analysis of the ship demolition market. Marine Policy (2008), doi:10.1016/j.marpol.2008.02.004