Challenges And Choices For Disposal Of Present Ship Finance Essay

The determination to trash a vas depends on a series of variables, which have to be closely measured by companies running fleets of ships, because of its high fiscal deductions. Stopford ( 2009, pp. 159 ) , deduced that although there is no specific age for trashing a ship, its technological relevancy ; its market bit value ; its gross bring forthing capacity, and future market chances are outstanding points to see. Furthermore, one time a replacing tunnage is kind after, the challenges imposed by its bit market value, every bit good as international ordinances have to be considered in make up one’s minding on which preferable method of ship disposal to use. Consequently, sing the assorted fiscal agreements for securing a replacing tunnage, critical consideration has to be given to available funding options, before make up one’s minding on the best option for trashing or securing a vas. This study aims to research these variables, with the aim of foregrounding their challenges, every bit good as relevancy within the maritime industry.


Market monetary value of Scrapping ( Shipping rhythm )

The monetary value ship surfs are willing to purchase a ship for recycling has to be closely considered. Most times, ships to be scrapped are sold off to transport surfs, who so decommission the vass and sell the parts off as bit steel for many industrial intents every bit good as building ; this option of trashing a vas is extremely popular in Far East Bangladesh, India and China ; moreover, the bit market monetary value is influenced by demand for steel, every bit good as the figure of ships available for trashing within the industry at a peculiar clip or one-fourth of the twelvemonth ; this phenomena is known in the maritime industry as the transportation rhythm ; for this ground, It is really of import non to sell-off a vas for trashing when the market value is low, peculiarly when the demand for scrap steel is low ; This construct is supported by Gibson ( 2010 ) , which indicates that between 2009 and 2010, the universe steel production every bit good as scrap demand weakened because the Chinese authorities decided to fasten banking loans in its building industry ; the study besides indicates that China histories for about 45 % of universe steel production and demand as a consequence of its present rise in industrialisation and Gross domestic merchandise ( GDP ) ; nevertheless, as a consequence of the sudden low demand for steel and bit metal in 2010 compared with 2008 and 2009, the market value for bit steel has significantly dropped because of glut, as indicated in figure 1.

Figure 1

Hess et Al ( 2001 pp. 116 ) , besides indicates that another factor which influences the recycling market monetary values of ships is its light weight loss due to corrosion, when compared with its original visible radiation weight when built, every bit good as the value of equipments within the ship.

Statutory demands

Over the old ages, conventions and domestic Torahs have been developed and adopted by many states in order to set up demands for disposal of vass ; such demands revolve around Environmental issues and workers safety and wellness. A Transporting company found apt of non following with such Torahs could incur potentially heavy mulcts, and an expensive judicial proceeding in a tribunal of jurisprudence falling under assorted legal powers ; for illustration, the Environmental intelligence service ( 2010 ) edition stated that in 2003, four United States naval ships were banned from being dismantled within the United Kingdom after being towed across the Atlantic, as a consequence of a claim made to the English tribunal by an environmental bureau, claiming the ships were contaminated with carcinogenic stuffs and asbestos. Another related illustration is The High tribunal of Justice QBD ( 2008 ) Jean Kennedy V Health and Safety Executives of Able UK limited ; although this instance was finally dismissed in favor of Able UK ship-breaking limited, it shows how sensitive issues can originate in trashing a vas.

Examples of statutory demands within the maritime industry are:

Basel Convention 1992: This international convention was developed because of indiscriminate disposal of contaminated vass in developing states, as a consequence of rigorous environmental Torahs enforced within Europe in the 1980s, doing recycling of ships really expensive to transport proprietors. The Basel convention is designed to command the trans-boundary motion of ships for decommissioning, because many old ships were known to hold risky waste potentially harmful to human wellness and the environment. For this ground, the convention developed a control frame work for the motion of ships for decommissioning, and all signatory provinces are required to follow and implement its demands.

The International Maritime Organisation ( IMO ) ship recycling convention: In 2005, the IMO assembly adopted a declaration empowering the Marine Environmental Protection Committee ( MEPC ) to develop ordinances for ship recycling, qualifying demands for a vas green passport ; recycling installation enfranchisement ; and enforcement. The declarations led to the development of the Hong Kong convention on recycling of ships in 2009, which would be enforced and complied with by party provinces one time to the full adopted in the close hereafter.

Operational challenges generated by these statutory demands

Based on the analysis of both the market monetary value and legal demands for scrapping, other challenges encountered are as illustrated below:

The Hong Kong convention ( 2009 ) indicates that a transportation company would be required to happen a duly authorized ship ledgeman, capable of managing the type and sum of risky stuffs found onboard the ship.

Second, the Hong Kong convention ( 2009 ) indicates that transporting company will be required to hold an Inventory of Hazardous stuff ( green passport ) for its ship in conformity with the IMO convention on ship recycling, and this papers is required to be made available for the ship ledgeman.

Third, the Hong Convention indicates that a specializer company has to be hired to carry on review of the ship and bring forth the Inventory of risky stuffs at excess disbursal to the ship proprietor.

The Basel convention ( 1992 ) , indicates that an application has to be made to both the Governments involved with the export and import of the ship for recycling, and a certification known as the International Ready for Recycling certification ( IRRC ) has to be issued to the ship proprietors before recycling can be considered legal.

Even with all these standards in topographic point, there is still the possible challenge from claims by Environmental protection organic structures and NGO ‘s trying to halt recycling contracts if they still consider the decommissioning potentially insecure, like the instance cited in the Environmental intelligence ( 2010 ) edition, in which the US naval vass were non allowed to be decommissioned in England.


4.1 Conversion into Long Term Storage installation at sea:

This option of disposal of the ship involves change overing the ship into a storage installation at sea, or within the coastal Waterss of a port. This method of decommissioning is non a 100 % recycling process, but can be favorably employed by companies runing big oilers or liquefied natural gas workss. The chief challenge of this method of disposal is that it still generates care cost as illustrated in figure1 below:

Figure 2

Beginning: Ron Hess et Al ( 2001 ) Disposal Options for ships pp. 12

Hess et Al ( 2001 ) indicates that if the company does non mean bring forthing gross after change overing the ship into a storage installation, the fiscal loss incurred from care of the hull and paying for adult male power will be cumulatively really high as shown in figure 2. Another challenge is the fact that the storage installation ‘s hull shell plating could eat and finally check over a period of clip, and accordingly do pollution of the Marine environment if it contains any pollutant or risky stuff. The storage installation would necessarily hold to be disposed off, and for this ground it merely acts as a impermanent respite pending the clip it has to be eventually decommissioned. Examples of such long term storage transitions are the ‘Al-Zaafarana ‘ 1994 Floating Production Storage and Offloading ( FPSO ) unit in Egypt, and the ‘Armada Perkasa ‘ 2009 FPSO in Nigeria.

4.2 Ship Breaking

This method of disposal as discussed earlier, involves selling the ship to a ship ledgeman sooner through a agent ; the ship ledgeman so decommissions the ship, and sells off its parts as bit in the bit market. This method of disposal is regarded as environmentally safe, and it is widely used in Far East states like China, India and Bangladesh as a preferable method of disposal because of the available inexpensive labor involved as indicated in figure 3. But it still raises a batch of concerns related to the safety and public assistance of the workers, every bit good as their human rights, because of the potentially toxic and insecure stuffs like asbestos, arsenic, radioactive waste or residuary oil in the vas. Green peace-International Federation for Human Rights ( 2005, pp 5 ) , estimates that about a 1000 scrap-yard workers have died in Chittagong ( Bangladesh ) over the past 10 old ages ; the study besides indicates that kid laborers are being employed by the bit paces in India and Bangladesh ; this fact every bit good as other issues led to the debut of statutory demands for decommissioning ships.

For this ground, a transportation company is required to guarantee that its ship ledgeman is capable and certified to dispose its vas, in an environmentally safe mode, without put on the lining the lives of its employees, by conforming to the international wellness and safety criterions stipulated by the International Labour administration ( ILO ) and the Basel convention in order non to be held apt to ticket and prosecution.

Another challenge would affect fixing the ship for scrapping, because the transportation company would be required to clean all armored combat vehicles within the hull of the vas, every bit good as carry out an stock list of all risky stuffs onboard the ship and bespeak its matching location.

Figure 3

4.3 Artificial Reefing

This disposal option involves selling or donating the ship to authoritiess willing to change over the vas into an unreal reef at sea ; it involves the sinking of the vas at a designated topographic point at sea, to move as an unreal home ground for sea life, thereby bettering fishing and moving as a tourer location for plunging. Hess et Al ( 2001, pp.60 ) explored this construct, by bespeaking that in the past 25 old ages the Atlantic and Gulf provinces have converted 846 vass into reefs, and 100s more would most probably be required in the close hereafter ; nevertheless, this method of disposal besides has its challenges. Hess et Al ( 2001 ) , indicates that the challenges revolve around the cost of fixing the vas for disposal, processing and direction of pollutants like asbestos and other toxins, and duty for pull offing the reef ; another possible issue observed from analyzing this option of disposal is the fact that, it has a clear long term fiscal benefit to prospective authorities purchasers, but merely limited immediate fiscal benefit to a transportation company, while still doing the company potentially capable to shared liability.

4.4 Resale of ship

This involves renovating the ship and reselling it based on its 2nd manus value to prospective purchasers. This method of disposal could make a batch of net income if the vas can still provide the sea for commercial transit, but its value is capable to depreciation with age, every bit good as demand and supply elements of the transportation rhythm. Stopford ( 2009, chapter 5 ) indicates that a close consideration has to be given to the scrap monetary value of the ship and its jutting 2nd manus value, before transporting out disposal ; this could be done through the services of a gross revenues and purchase ship agent, or a recognized independent assessor, but the transportation company can still theorize on future rise of planetary demand, adequate to acquire a good sale value for the vas.


There are many methods of geting finance for an extra ship. Branch ( 1998 ) indicates that the finance options for vessel acquisitions autumn under the Equity capital market or debt/lease based dealing options. Each method of geting finance besides has its challenges, peculiarly when financing a new physique with no collateral in the signifier of a hull, while payment to the shipyard is required to be made in phases. Stopford ( 2009 ) illustrates the assorted methods of financing a ship as described below:

5.1 Private Loan Capital: In this instance, capital is generated from the transporting company ‘s financess or through a private loan agreement with people of high fiscal art. Branch ( 1998 ) indicates that this is a signifier of equity acquisition via the capital market, and it involves shared hazard between both moneymans and ship proprietor. Stockss owned by the transportation company can be sold to ease the funding of replacing tunnage, and agreements could besides be made with willing investors or company portion holders ; nevertheless, footings and conditions every bit good as per centum equity interest are in private agreed with the investors.

5.2 Bank Loans: This signifier of capital coevals could besides be subdivided into mortgage, corporate, shipyard recognition, and mezzanine loans. The bank or mortgage establishment could utilize the clip charter understanding or hull value of the vas to be obtained as collateral for the loan, and the type of bank loan sourced for determines the type of bank, clip frame and involvement rate refund on the loan obtained. Stopford ( 2009 ) indicates that the chief challenge with this method of financing a ship comes to light if financing a new physique through episode payments to a shipyard ; if due to unanticipated fortunes the shipyard becomes insolvent, the initial collateral used for obtaining the loan might be lost, go forthing the transportation company still apt to refund the loan through other beginnings. Furthermore, Branch ( 1998 ) suggests that first balcony finance is an intermediate between private loans and bank loans, with the option of the loaner geting the plus in the event of default on refund.

5.3 Public offers or Bond issue: It involves puting a public offer in the bond or equity market through Initial public offers on a stock exchange ; this is done through the services of an investing bank. In the equity market, the public buys portions in the company, and hence portion liability in the event of fiscal loss every bit good as addition in the signifier of dividends with the company ; capital can be raised in the signifier of bonds, repayable at an in agreement clip, with involvement payments on the bond at intervals within a clip frame. However, Stopford ( 2009 ) suggests that chief challenge with this signifier of geting gross is that, the transportation company would be required to be assessed by a recognition evaluation bureau such as Moody or Standard & A ; hapless, who so delegate a recognition evaluation to the company in comparing with other sectors of the industry ; moreover, because of the extremely volatile nature of the transportation industry, a high recognition evaluation suited for bring forthing public involvement on portions is hard to obtain, and for this ground merely big transporting company ‘s like Alpha transportation, MC transportation ( till September 2007 ) and Sea containers are known to publish bonds.

5.4 Financing through particular purpose companies:

Branch ( 1998 ) suggests that this method involves renting a ship over a clip frame from a leasing company, financed by public investors and bank loans, through a clip charter understanding. Furthermore Stopford ( 2009 ) indicates that the leaseholder company buys and owns the ship, and the transportation company merely engage the ship for the intent of trade it is concerned with over an in agreement clip frame ; plenty to enable the leasing company bring forth its net incomes from renting the ship. Although this method has the benefit of alleviating the transporting company from conditions and liability attached to a bank loan, every bit good as the benefit of easy obtaining a ship at short notice, the transportation company is still obliged to carry through the footings and conditions listed within the clip charter understanding made with the leasing company. Examples of such particular intent companies are the Norse K/S partnership construction and the German KG fund.

6. Decision

In make up one’s minding the best clip and method to dispose a ship, it is of import to see the expected future cargo rate ; the ships scrap value ; and its 2nd manus value. It is every bit of import to see the domestic and international legal demands to be addressed before puting out to dispose the vas, in order non to incur heavy mulcts and prosecution. There are besides many methods of financing a replacing tunnage depending on if it is a new physique or a 2nd manus ship, and these methods attract different fiscal deductions, peculiarly if the transportation company still intends commanding its assets. Stopford ( 2009 ) indicates that financing a ship through particular purpose companies and Public offers in the stock market is an attractive option, because liability in the event of a loss is limited, and more concern is for the profitableness of the transportation venture ; but financing through debt options like loans, have a higher hazard, which depends on the ability of the company to refund its debt over a defined clip frame.


Basel Convention available @ hypertext transfer protocol: // accessed 19/12/10

Branch A 1998, Maritime Economics: Management and Marketing 3rd edition ; United Kingdom: Stanley Thornes Ltd.

Environmental intelligence service 2010. Available @ hypertext transfer protocol: // accessed 20/12/10

Gibson 2010, Dry bulk ships Report pp 6 and7.

Green peace-International Federation for Human Rights, 2005: The human cost of ship breakage. Available @ hypertext transfer protocol: // ( accessed 21/12/2010 )

Martin Stopford, 2009. Maritime Economics 3rd Edition: Routledge.

Ron Hess, Denis Rushworth, Michael Hynes, John Peter, 2001: Disposal Options for ships. Available @ hypertext transfer protocol: // Accessed 20/12/2010

The High tribunal of Justice QBD ( 2008 ) Jean Kennedy V Health and Safety Executives of Able UK limited. Available @ hypertext transfer protocol: // accessed 19/12/10.

The Hong Kong convention ( 2009 ) , Available @ hypertext transfer protocol: // accessed 19/12/10