Daily Times

The sinking of the Pakistani merchant ship SS Al-Abbas on the 16th of August, 1971 by the Mukti Bahini was momentous not least because it’s salvage and scrapping heralded the rise of Chittagong as a major competitor for Pakistan in the ship breaking arena. Gadani in Pakistan, Chittagong in Bangladesh and India’s Alang-Sosiya are the South Asian powerhouses that together account for a very substantial percentage of the global shipbreaking industry, topping 80% of all ship demolition activities. The early 1980s saw Gadani well on its way to becoming the foremost destination for ship recycling, but it’sstar waned over the subsequent decades as its Indian and Bangladeshi competitors, amply protected and supported by robust government policies, overtook Gadani. Is Gadani just one more example of Pakistan’s careless squander when it comes to nurturing home-grown, successful ventures or is it a victim of political interference and hobbling to serve the aims of our politician-industrialists?

For as long as ships have plied the seas, salvage has been lucrative and economically important. The early 20th century sawmetallurgists blend scrap steel from salvaged ships with new metal to produce strong, durable, and economical ship frames, resulting in the establishment of a global metal scrap industry, now projected to reach a value of $380 billion. And the nascent ship breaking industry ensured a prolonging of the economic value of ships as they were taken apart and used to provide the steel industry with a supply of excellent quality scrap. The industry moved from Europe and the US to East Asia and finally settled in South Asia with its low labour costs and geographical advantages.

Gadani was a gift to Pakistan, with informal ship breaking operations preceding the partition of South Asia in 1947. The 1970s saw the Pakistani government awaken to Gadani’s potential and infrastructure initiatives, coupled with reduced import duties on old vessels and the designation of Gadani as a legal port, led to a golden period for this lonely expanse of sand, located in a province where life is inexorably entwined with poverty and deprivation. Gadani, in its heyday, employed over 30,000 workers, supported nearly 300,000 people downstream, generated tens of millions of rupees in taxes and produced over 1 million tons of steel plateannually destined for the re-rolling mills. This steel was used to power the construction sector and to accommodate the pressures of urbanization and commercial construction. The serendipitous confluence of supply and demand put Gadani in a neck and neck race with Taiwan to become the largest shipbreaking operation in the world.

Then came the era of General Zia, and a series of economically incomprehensible steps resulting in the near total destruction of Gadani. Import duties on ships were ratcheted upwards at a punishing rate from 1983 onwards, as too were the tariffs imposed on downstream industries such as the steel re-rolling sector. The end result meant that the cost of buying a ship for demolition was actually lower than the import duties and tariffs that would have to be paid on it. An industry that had been generating nearly 300% profit and millions in taxes dwindled down to nothing by the end of the 1980s. Trying to analyse or comprehend much of what went on in Pakistan during that decade with its toxic swirl of politics, business, war, and expediency is a difficult task. But many decisions bore the sterling silver hallmark of South Asian politics – the preservation and growth of the politician-industrialist’s wealth and business interests. Steel importers and steel mill owners found their stars aligning with General Zia’s desire for political legitimacy, and combined with the money-pit called Pakistan Steel Mills and criminally interventionist fiscal policies, Gadani was decimated.

The damage a freight rate war could cause to companies already on the brink of bankruptcy has led to cost-cutting and capacity management measures that have created an enormous and growing demand for the services of the South Asian ship breakers

The subsequent decades have seen various attempts to resurrect Gadani with some success although the tax and tariff balance between importers and breakers has never again fallen in favour of the shipbreakers. Gadani’s blessings in the form of deep-sea beaches, favourable weather conditions, cheap and plentiful labour, and a proven track record have never been deemed sufficient for harnessing and development perhaps because the lives and livelihoods of the poorest of the poor have always lost out against the interests of powerful lobbyists. Bangladesh, meanwhile, has taken over as the second largest ship breaking yard in South Asia, accounting for over 40% of domestic steel demand and providing employment to over 250,000 workers in the yards and downstream.

India’s Alang-Sosiya has placed itself in a unique hybrid position through the country’s passing of the Ships Recycling Bill 2019 and adoption of theHong Kong Convention. While scrapping costs will increase for India in the short-run, giving a comparative advantage to Gadani and Chittagong, this move will be immensely valuable in the future as more and more shipping and freight companies, in a bid to comply with the EU Ship Recycling Regulation, are having to evaluate the environmental and human impact of ship demolition before choosing their market.The Seatrade judgement holding the ship owner criminally liable for selling 4 toxic ships to be beached and scrapped at the Indian yards has set a Europe-wide precedent and standard for ship demolition.

It is the economic anomaly of ship breaking and its inverse relationship to freight rates and consequently global trade that has the SouthAsian yards in the spotlight at this time. The Global Market Meltdown of 2008 crashed freight rates and placed immense pressure on the shipping lines, resulting in 2009 becoming a boom year for the ship breaking industry with over 1300 ships scrapped. And now with Coronavirus and the Great Global Lockdown throttling the global supply chain at both ends, shipping lines are having to face the twin spectres of plummeting freight rates and high layover costs. The damage a freight rate war could cause to companies already on the brink of bankruptcy has led to cost-cutting and capacity management measures that have created an enormous and growing demand for the services of the South Asian ship breakers. Based on the best estimates by governments and global trade and finance institutions, the recovery period for the global economy will be long and protracted, which heralds a boom time for ship recycling. For Gadani the ships are coming but infrastructure development, health and safety regulations, labour laws, modernization, andeventual alignment with global standards of ship demolition require sector-specific measures, both fiscal and regulatory that might give us a fighting chance at long-term competitiveness.

The writer is an investment analyst