What awaits shipbreaking in the future?

During the fiscal year 2020-21, even amid the Covid-19 pandemic, Chattogram's Sitakunda coastline saw 232 expired seafaring vessels dismantled. The total weight of these ships amounted to 2.53 million tonnes. 

With a customs duty of Tk2,500 per tonne, the government generated approximately Tk633 crore in revenue from the sector. Additionally, businesses are required to pay separate fees for 28 different types of approvals. 

Despite these contributions, industry stakeholders complain that the sector receives inadequate support. They argue that excessive regulations, heavy taxation and bureaucratic delays are threatening the industry, which had maintained a top global position for nine consecutive years but is now shrinking.

Lack of support amid rising costs

Despite generating hundreds of crores in revenue, shipbreaking industry owners argue that the government is not providing the necessary support. For example, while many countries have government-managed Treatment, Storage, and Disposal Facilities (TSDF) to handle industrial waste, Bangladesh lacks such infrastructure. This forces shipyard owners to manage hazardous and medical waste on their own.

Adding to their challenges, importers now have to pay full customs duties on every item found on dismantled ships, treating them as if they were brand new. On top of that, the dollar shortage and changes in import policies have driven up operational costs.

The situation is expected to get tougher with the Hong Kong Convention coming into effect soon. This regulation will allow only green shipyards — those meeting environmental and worker safety standards — to import ships for dismantling. Bangladesh currently has just five certified green yards, with 15 more in the process of approval.

By next year, only 20 yards are likely to be operational, drastically reducing the industry's capacity from four million tonnes a year to just 1.5-2 million tonnes. This decline could slash jobs in the sector, shrinking the workforce from 50,000 to about 10,000 workers.

Declining number of shipbreaking yards

The Bangladesh Ship Breakers and Recyclers Association reports that Sitakunda once boasted 160 active shipyards. However, many had to shut down due to market fluctuations, excessive imports, political instability, and a slump in the real estate sector. 

By 2019, the number of active yards had dropped to 90. The situation worsened after the Covid-19 pandemic, as rising global raw material prices forced around 30 more factories to close. On top of that, a continuing dollar shortage made it difficult to import essential materials, leading to the shutdown of another 40 yards.

Today, only 30-35 yards remain operational, with some running sporadically. The industry initially grew to meet the rising domestic demand for steel, as dismantled ships supplied crucial scrap metal. 

However, ongoing challenges such as rising taxes and currency issues are now threatening the sector's long-term sustainability.

Tax burden and financing issues

Industry stakeholders report that beyond paying customs duties on old ships, they now face separate tariffs on every item found on board. Since 2022, these items have been taxed as if they were brand new, squeezing profits to the point where some are sold at a loss.

The challenges don't stop there. The Covid-19 pandemic, the Russia-Ukraine war and declining foreign reserves have made it increasingly difficult for importers to secure letters of credit (LCs) from banks. 

Previously, LCs could be issued against fixed deposit receipts (FDRs), allowing importers to earn interest. Now, cash deposits are required, further straining their finances.

The high cost of green shipyards

Setting up environmentally compliant green shipyards requires substantial investment. Entrepreneurs estimate that building a small yard costs Tk30-50 crore, a medium yard Tk50-80 crore and a large yard Tk100-150 crore. 

On top of the initial investment, operating expenses and the time needed for ship-cutting permits have also increased. 

Dismantling ships in green yards can take 1.5 to 2 months and any delays add extra costs, including bank interest. With rising operational expenses, profits are expected to shrink, raising concerns about the sector's sustainability.

Sekandar Hossain, the owner of the shipyard company SND Corporation, told The Business Standard, "Costs have increased compared to before, and expenses will rise further with the introduction of green shipyards. To sustain the industry, the NBR needs to adopt a more flexible approach in its policies. Streamlining the approval process by reducing bureaucratic hurdles will also help lower costs."

According to the Belgium-based Shipbreaking Platform, South Asia dismantles 90% of the world's old ships, with Bangladesh, India and Pakistan leading the way. Starting in July 2025, all countries will implement the Hong Kong Convention for shipbreaking.

India plans to convert around 100 small shipyards into green facilities, while Pakistan has only about five to six, and Bangladesh has around 20. Notably, shipyards in Bangladesh are larger than those in India, making Chattogram a prime destination for massive vessels.

Bangladeshi entrepreneurs point out that transforming smaller Indian shipyards into green facilities requires an investment of just Tk5 to 10 crore and cranes can be rented easily. In contrast, costs in Bangladesh can range from Tk30 crore to 150 crore.

With the implementation of the Hong Kong Convention, expenses in Bangladesh are expected to rise even more, meaning that only large investors or those with multiple business ventures are likely to survive. Relying solely on shipyards will become increasingly difficult. 

Moreover, to prevent scrap from falling into the sea at green yards, most operations will need to be carried out using cranes, which must be imported. Unfortunately, customs duties on cranes have jumped from 1% to 28% this fiscal year.

Zahirul Islam, the managing director of PHP Ship Breaking and Recycling Industries—Bangladesh's first green shipyard builder—and vice president of the Bangladesh Ship Breakers and Recyclers Association, told The Business Standard, "We have invested approximately Tk100 crore and also have other businesses. However, not everyone will be able to sustain this. Starting in November, only owners of green yards and those in the process of establishing them will be permitted to import old ships. 

"We anticipate the construction of about 20 new yards next year, with an additional 15 to 20 the following year, bringing the total to around 35 to 40 yards."

He added, "Bangladesh still has a significant need for infrastructural development. As long as this development continues, the demand for steel will persist. Consequently, the shipbreaking industry, which provides raw materials, will also remain viable. However, smaller yards may struggle due to rising investment and operational costs."