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The Economics of Ship Recycling

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  • Pacific Merchant Marine Council, NLUS
    More than you probably care to know about ship recycling. I have wondered for quite some time of simply beaching ships at a location on the shoreline of Suisun
    Message 1 of 1 , Jun 17, 2008
      More than you probably care to know about ship recycling.
      I have wondered for quite some time of simply beaching ships at a location on the shoreline of Suisun Bay and cutting them up there insteady of preparing them to be towed elsewhere. There are way too many interested parties involved and a stalemate has resulted. An adjacent small smelter and steel mill to produce sheet steel and rebar would provide needed steel. If a drydock is required look no further than Mare Island.
      State wants assurance from Maritime Administration that ships won't
      http://www.insideba yarea.com/ search/ci_ 6647640?IADID= Search-www. insidebayarea. com-www.insideba yarea.com Dispute on deck as four U.S. ships set to be towed ...

      8 May 2006 Letter to Oregon International Port of Coos Bay about the Economics of Ship Recycling at Coos Bay

      by Range (Richard) Bayer, Newport (Oregon) citizen

      This letter has been reformatted for the Internet. First put on the Internet: 8 May 2006. Last Addendum: 18 Sept. 2006. Links Last Checked: 6 May 2006

      New Has the Commission of the Oregon International Port of Coos Bay Handled Their Land Deal for the Liquefied Natural Gas (LNG) Terminal, Shipbreaking, and Other Issues with Due Diligence? (Nov. 22)
      * 23 May 2006 Letter to U.S. Rep. Peter DeFazio with Copies to U.S. Senators Ron Wyden and Gordon Smith about the Possible Shipbreaking Facility at Coos Bay, Inadequate Funding of U.S. Maritime Administration (MARAD) and Navy Ship Disposal Programs, and Congress' and MARAD's Continuing Efforts to Export Obsolete Government Vessels to Be Scrapped
      * Proposed Shipbreaking (Ship Recycling) of U.S. Maritime Administration (MARAD) or Navy Ships in Oregon or Washington

      Table of Contents for 8 May 2006 Letter to Oregon International Port of Coos Bay. [In the original, the Table of Contents was at the top of p. 3. Some addenda of relevant material has been added inside brackets.]

      [Start of Letter]
      A. Opportunity: Need to Dispose of Obsolete MARAD and Navy Ships
      B. Risk of Building a Drydock for Ship Recycling in Oregon
      C. Opportunity and Risk: MARAD Ships Are Available to Recycle But Is There Enough Federal Money to Fund Recycling?
      D. Risk of Too Few Ships to Recycle to Pay for the Cost of Constructing a Drydock or to Continue Ship Recycling
      ..... D-1. MARAD May Dispose of Ships by Alternatives to Ship Salvaging
      ..... D-2. Competition from Domestic Ship Recyclers
      ..... D-3. After the Current Backlog of MARAD Ships Is Gone, Few Additional MARAD Ships Are Predicted to Become Available
      ..... D-4. Foreign Recycling of Obsolete U. S. Government Ships
      ..... D-5. Foreign Recycling of Commercial (Private) Ships
      E. Risk: Higher Scrap Prices in Brownsville and Variable Scrap Metal Prices
      F. Risk: Underestimating the Costs Required to Dismantle a Ship
      G. Risk: Disposing of Ships Abandoned in Coos Bay
      H. Why Aren't More U.S. Companies Involved in Salvaging MARAD Ships?

      Appendix A. Income and cost items for ship recycling.

      [Start of Letter]

      P.O. Box 1467
      Newport, OR 97365
      8 May 2006

      Jeffrey Bishop, Manager; Port Commissioners David Kronsteiner, Caddy McKeown, Dan Smith, Brady Scott, Jerry Hampel
      Oregon International Port of Coos Bay
      P.O. Box 1215
      Coos Bay, OR 97420

      Dear Mr. Bishop and Commissioners Kronsteiner, McKeown, Smith, Scott, and Hampel:

      Re: economics of ship recycling at Coos Bay.

      In an April 7 article in the Coos Bay World (footnote *40), it was reported that the Oregon International Port of Coos Bay would be holding a public forum about the business side of ship recycling in early May and that the Port was open to questions and comments. Accordingly, I am writing this letter with comments and questions about business concerns of shipbreaking in Coos Bay. I will also post it at http://www.orednet.org/~rbayer/salvage/coosbay.htm [must use all lower case letters] for your convenience in looking up footnotes.

      There is risk in any business venture. But do the construction of a graving drydock and the operation of a ship recycling company in Coos Bay represent a reasonable business risk or is it speculation?

      Proper disposal of U.S. Maritime Administration (MARAD) and Navy ships is a federal funding problem. If MARAD, the Navy, or the U.S. Congress decides to require all recycling of MARAD and Navy ships to be done in drydocks and if Congress provides the funds needed to do so, then a Coos Bay ship recycler using a drydock may be a reasonable business risk. However, MARAD is not requesting ship recycling be done only in drydocks, and MARAD is trying to dispose of ships with as little cost to the federal government as possible (*35). Further, legislation to require the use of drydocks would hurt Texas ship recyclers, who have considerable clout in the U.S. Congress (e.g., *61), so it very questionable that such legislation would pass, even if it was introduced.

      Some points include:

      * The construction of graving docks similar to Ecodocks for shipbreaking has been suggested for Coos Bay. The cost of a graving drydock has been estimated as at least $30-40 million and of an Ecodock as $72-79 million. This is a considerable sum of money in the domestic ship recycling industry as Bay Bridge Enterprises sold for less than $10 million in 2005, MARAD's entire shipbreaking program was budgeted only $16 million in Fiscal Year 2004, and the domestic ship recycling industry continues to have bankruptcies and companies ceasing to recycle government ships.

      * The federal government must subsidize the recycling of its ships because the costs of dismantling ships in accordance with safety and environmental standards is generally much greater than the value of scrap.

      * MARAD has not asked for or received the funding necessary to scrap all of its obsolete ships. Consequently, the number of ships available to scrap has been irregular. This leads to boom cycles of hiring when ships become available and bust cycles of layoffs when they are not.

      * Some U.S. government ships have already been scrapped in drydock. A California drydock used for recycling Navy ships closed in 2001 because of inadequate federal funding and an inconsistent supply of ships. The company stated that it closed because the profitability was marginal compared to the risk.

      * A Coos Bay facility would compete with Brownsville in-water ship recyclers that have already scrapped some MARAD ships from Suisun Bay near San Francisco.

      * The main competitive advantage of a Coos Bay facility would be lower towing costs.

      * One major competitive disadvantage would be paying higher wages to attract workers, unless a Coos Bay facility pays as low as wages as Brownsville ship recyclers ($7-7.50 per hour for laborers without health benefits and $40,000 a year for a bilingual supervisor of 120 employees). Brownsville ship recyclers have a large labor pool that includes Mexicans legally commuting across the border.

      * Other significant competitive disadvantages for a Coos Bay facility would be much lower scrap prices than are available to Brownsville ship recyclers, the cost of constructing and operating a drydock, less favorable weather conditions to continually scrap ships, and initial costs for dredging a channel to a drydock.

      * In 1999, an in-water Brownsville ship recycling company's bid to recycle a Navy ship moored in California was less than 50% of that by Cascade General, a Portland shipyard with a drydock, and the Brownsville company was awarded the contract, in spite of costs to tow the ship through the Panama Canal to Brownsville.

      * After the current backlog of MARAD ships is disposed of, few additional MARAD ships are expected to become available each year, so a Coos Bay facility would then be less viable.

      * As of October 2005, MARAD continues to try to export its obsolete ships as it did in 2003. If it is does, then foreign ship recyclers are expected to win the bids for recycling ships. Denny Vaughan's Environmental Recycling Systems (ERS) has been mentioned as interested in scrapping ships in a Coos Bay drydock, and, in 2004 and 2005, ERS sought to recycle MARAD ships in Turkey and Mexico because it would be more economical to do so there than in the U.S.

      * Most U.S. commercial ships are exported to be recycled, so a Coos Bay facility may not get enough of them to keep operational between winning competitive bids with Brownville ship recyclers for MARAD ships.

      Thank you for your time and consideration.

      Sincerely yours,

      Range (Richard) Bayer, http://www.orednet.org/~rbayer/salvage/coosbay.htm [must use all lower case letters]

      cc: Martin Callery, Port Director of Communications and Freight Mobility

      P.S. The Oregon International Port of Coos Bay may consider inviting Alan Sprott and Alan Jones of the Cascade General shipyard in Portland to participate in its public forum about the business of ship recycling. Cascade General has recycled two fishing boats in drydocks, has bid to recycle Navy ships, and has made a public presentation in Newport about ship recycling. Their discussion about the business side of ship recycling was very enlightening.

      A. Opportunity: Need to Dispose of Obsolete MARAD and Navy Ships

      The U. S. Maritime Administration (MARAD) ship recycling program is for noncombatant vessels of 1,500 gross tons or more, and the Navy's ship recycling program is for combat vessels (p. 4 and 6 in *16, p. 2 of *42). They have separate ship disposal programs (e.g., *35).

      The U.S. Congress has long been against mooring obsolete MARAD and Navy ships indefinitely. In 1994, the U.S. Congress gave MARAD a deadline of 1999 to dispose of obsolete ships; this deadline was not attained, so the deadline was moved to 2001, then to September 2006 (p. 2 in *15, p. 6 in *16). It is not possible to meet the September 2006 deadline, so it seems likely that the deadline will be moved again.

      There are at least three reasons for disposing obsolete ships:

      1) FINANCIAL. In 2001, MARAD and the RAND Corp. reported that it cost approximately $20,000 per year to maintain each MARAD ship, $57,000 for each Navy ship, and that it would cost about $900,000/ship to drydock a vessel in 15-year cycles to prevent hull failures plus $200,000/ship to remove fuel (p. 10 of *42, Chap. 2 in *55). Over the long-term, the RAND Corp. estimated that it would probably cost over twice as much to store ships than to dismantle them with domestic ship recyclers (p. xv in *55). The RAND Corp. concluded that long-term storage is "not a sound policy" (p. xvi in *55).

      2) RISK OF ENVIRONMENTAL DAMAGE. A MARAD official testified in 2000 about MARAD's obsolete ships (p. 3 in *16):

      "Environmental dangers associated with these old, deteriorating ships are increasing daily. The so-called 'worst condition' vessels are about 50 years old and have been awaiting disposal for 22 years on average. These vessels contain hazardous materials such as polychlorinated biphenyls (PCBs), asbestos, lead-based paint and fuel oil. Some vessels have deteriorated to the point where a hammer can penetrate their hulls. If the oil from these vessels were to enter the water, immediate and potentially very expensive Federal and state action would be required. For example, MARAD spent $1.3 million on a costly environmental cleanup because one of the 'worst condition' vessels deteriorated to a point where oil leaked into the water."

      Further, MARAD's 2001 report stated about the need to remove its obsolete ships (p. 21 in *42):

      "The urgency is in part due to the location of the three fleet sites [California, Virginia, and Texas] in areas bordering on sensitive estuarial wetlands where the release of petroleum products or hazardous materials could generate significant clean up costs and have lasting environmental impact."

      3) WASTE OF RESOURCES TO NOT RECYCLE SHIPS. It is not feasible to reuse these vessels for shipping, so they serve no purpose by just being moored. The remaining obsolete ships could be put to use by being scrapped, made into reefs, or donated to become museums, and these alternatives would also create jobs (section D-1). Some U.S. companies have been salvaging MARAD and Navy ships for several years to recycle or reuse whatever is possible. For example, Rick Makoujy of International Shipbreaking Ltd. in Brownsville, Texas stated in 1996 (*53):

      "This is merely a recycling business. The biggest aspect of our business is the sale of scrap steel."

      One ship they recycled yielded 6,900 tons of scrap steel, 200 tons of reusable items, 75 tons of non-ferrous metals, 200 tons of cutting waste, and 200 tons of debris (*53).

      B. Risk of Building a Drydock for Ship Recycling in Oregon

      According to the Oregon Department of Environmental Quality's 3 April 2006 Fact Sheet for Coos Bay (*39):

      "Governor Kulongoski stated that any ship breaking operations locating in Oregon would have to ensure the level of environmental protection offered by a dry dock operation."

      Perhaps, the next Governor will change this executive directive, but, for now, this applies.

      Environmental Recycling Systems is interested in building two graving drydocks at Coos Bay to salvage ships (*30). A graving drydock is excavated in the ground, walled in concrete, and separated from water by a watertight gate; in operation: it is filled with water, a ship is floated in, the gate is closed, and the water is then pumped out. Environmental Recycling Systems' Denny Vaughan was reported to have described the Coos Bay facility as (*30):

      "All water around the vessel or that falls from the sky into the specialized lock would be filtered. The environmentally conscientious Norwegians come close, he said, with their eco-dock concept. 'We want to be 100-percent self-contained. Once a ship goes in those doors close behind it,' he explained."

      A floating drydock is constructed of floodable buoyancy chambers; in operation: it rests in water, the chambers are filled with water, the dock sinks, the ship is moved in, and then the water is pumped out.

      Scrapping MARAD or Navy ships in a drydock is not a new idea. Baltimore Marine Industries/North American Ship Recycling (Baltimore Marine Industries after bankruptcy became North American Ship Recycling [*7, *45]) in Baltimore, Maryland and Metro Machine in Philadelphia, Pennsylvania have scrapped MARAD or Navy ships in drydocks (*41, p. 20 of *55). Ship Dismantlement and Recycling Joint Venture also scrapped Navy ships at a drydock in the Hunters Point shipyard near San Francisco until late 2001, when it announced that it would shut down because of the high cost of maintaining a drydock with no work under contract and insufficient projected contracts (p. 10 of *43). Former Navy commander Gary Whitney of Allied Defense Recycling LLC has also been working to get a lease to open the former Naval shipyard and drydocks at Mare Island near Suisun Bay to salvage MARAD ships from nearby Suisun Bay (*25, *26, *27, *28, *60). [Addendum. On 8 May 2006, Metro Machine that had recycled 18 Navy ships in a Philadelphia drydock announced that it would be closing because of financial reasons as it could not compete with Brownsville ship recyclers, *65, *68.]

      Constructing a graving drydock is not a small investment. Alan Jones of Cascade General shipyard in Portland that has a graving drydock estimated that it would cost "$30 or $40 million, minimum" to build a graving drydock in Newport (*23). Environmental Recycling Systems' proposed Coos Bay facility was said to be comparable to an Ecodock (*30), and the cost of two Ecodock facilities in Europe has been estimated to be $72-79 million (*63, *64). That is a lot of money considering that Bay Bridge Enterprises (an in-water ship recycling company in Virginia) was sold for less than $10 million in June 2005 (*20), MARAD was appropriated $16.1 million in Fiscal Year 2004 and $21.6 million in 2005 for their entire ship disposal program (p. 21 of *15), and the president of Esco Marine (a ship recycling company in Brownsville, Texas) was worried that their recent $1 million expansion would be wasted (*6).

      The investment of constructing new drydocks is also large considering the instability of the ship recycling industry, which has had a history of bankruptcies and closings as reported in a Pulitzer Prize winning investigative report series by the Baltimore Sun in 1998 (*8, *9). This includes the bankruptcy of a ship recycling company (Pegasus Inc.) at the Mare Island Naval yard near San Francisco in 1997 (*34), but also more recently with the closing of Ship Dismantlement and Recycling Joint Venture in San Francisco that was announced in 2001 because of financial concerns (p. 10 of *43, *47) [and the 8 May 2006 announcement that Metro Machine that recycled Navy ships in a Philadelphia drydock would be closing because of finances and competition (*65, *68)]. Further, there has been marked instability of ship recyclers within the past 5 years at the three locations where MARAD ships are recycled (Chesapeake, Virginia; Baltimore, Maryland; and Brownsville, Texas)(section XI in *4, p. 4 in *35):

      1) Bay Bridge Enterprises LLC recycles MARAD ships in Chesapeake, Virginia. It was created in 2001 when Mercer Wrecking & Recycling (Trenton, New Jersey) bought Jacobson Metal Co. and Peanut City Iron & Metal Co. Inc. from a defunct company (*10, *11 [these were incorrectly listed as *182, *184 in the original]). Bay Bridge Enterprises was sold in June 2004 and June 2005 (*5, *20), and its current ownership is through a chain of subsidiary companies in Dubai and Mauritius to the parent company in India (*2).

      2) In 2003, Baltimore Marine Industries, Inc. that did shipbreaking at the Sparrows Point shipyard in Baltimore filed for bankruptcy (*45). The site reopened in 2004 for recycling MARAD ships as North American Ship Recycling LLC (*7, *41).

      3) In 1997, there were three ship recyclers in Brownsville: International Shipbreaking Ltd., Transforma Marine, and Best Group (*62). In 2001, two companies were the same (International Shipbreaking Ltd. and Transformer Marine), there was one less (Best Group), and there were two new companies (Esco Marine and Bedoli Group)(*61). Four years later in 2005, only two of the companies in 2001 remained (International Shipbreaking Ltd. and Esco Marine), and there were two more new companies: Marine Metals, Inc. and All Star Metals, Inc. (*6, p. 4 of *35). Scott Harper (*6) wrote in 2005 that Brownsville has been a center for ship salvage companies since the 1960's and:

      "Only the names of the yards have changed over the years, due to bankruptcies and closings."

      With a large capital outlay for constructing a drydock, a ship recycling company may close when the number of MARAD ships available for recycling is reduced to the point where it is not financially feasible to continue operation. This supply can be reduced by inadequate funding to support ship recycling (section C), MARAD using alternatives to ship recycling (section D-1), competition with domestic (section D-2) or foreign (section D-4) recycling companies, too few government ships to recycle after the current backlog is depleted (section D-3), or foreign ship salvaging of commercial (private) vessels (section D-5). A second type of risk is losing money with a drop in scrap prices (section E) or underestimating the costs of salvaging a ship (section F).

      How much money will the Oregon International Port of Coos Bay or Oregonians finance for the construction and operation of a drydock in Coos Bay?

      C. Opportunity and Risk: MARAD Ships Are Available to Recycle But Is There Enough Federal Money to Fund Recycling?

      MARAD had about 60 obsolete ships at Suisun Bay, California in February 2005 (*13), which would be an opportunity for ship recycling. However, to dismantle and recycle MARAD and Navy ships with domestic shipbreaking firms requires government funding because the cost of dismantling these ships in accordance with safety and environmental standards is greater than the income from the sale of recyclable and reusable materials (p. 6 in MARAD's 2001 report [*42], p. 6 in RAND Corp. [*55]). For example, MARAD estimated that the costs of ship recycling in 2001 "will likely range from $240-$440 per ton" but that the average scrap metal value would be $130 per ton (p. 8 of *42). During 2004-2005, MARAD paid $35 million to domestic ship recyclers to scrap 33 ships (*20).

      Inadequate federal funding results in an intermittent supply of ships to scrap that leads to companies capable of ship recycling not entering the business (p. 6 of *42, *50), the closing of ship recyclers, or periodic layoffs. In November 2001, Ship Dismantlement and Recycling Joint Venture, a joint venture between Ship Remediation & Recycling Inc. (SRR, a subsidiary of VSE Corp.) and Earth Tech Inc., (Table B of *35, *44) told the Navy that it would be closing its ship recycling operation at Hunters Point in San Francisco (p. 10 of *43). VSE's annual report wrote (*47)(boldface added):

      "In 2001, VSE decided to discontinue SRR's ship remediation and recycling efforts at the Hunters Point Shipyard in San Francisco, California, due to the limited business opportunities associated with ship dismantlement work, due in part to an absence of any significant amount of government funding for these efforts. Profitability from the SRR work was marginal for VSE relative to the risk."

      The 2002 Navy report about their ship disposal program states (p. 10 of *43)(boldface added):

      "Ship Dismantlement and Recycling Joint Venture was the only privately operated facility on the west coast for dismantling of government ships in accordance with strict Federal, State, and local environmental and occupational safety laws and regulations. The establishment of another contractor ship dismantling facility on the west coast, if required or desired, will require new start-up costs to re-establish compliant ship dismantling processes. However, the requirement for another west coast ship dismantling facility will remain questionable without a long term funding stream that supports the award of at least three to four ships per year per facility."

      A 2001 National Defense Magazine stated in an article about the U. S. shipbreaking industry for MARAD and Navy ships (*49):

      "Every company official interviewed for this story said that he was concerned about keeping a trained crew on board. In order to maintain a trained workforce, Chambers [chief executive officer of International Shipbreaking Limited, ISL] explained, 'We need the ships to sustain it.' 'If Congress doesn't fund the program, the ships continue to languish and we have to let the people go,' he said. ISL laid off 85 people for five months and now only got half of them back, because there was no additional funding for the ships."

      In June 2003, Baltimore Marine Industries, Inc. at the Sparrows Point shipyard in Baltimore, Maryland filed for bankruptcy, and one of the contributing factors to its bankruptcy was an unsteady supply of MARAD and Navy ships to scrap (*45).

      The unsteady supply of ships as a consequence of inadequate funding leads to boom cycles of hiring when ships become available and bust cycles of layoffs when they are not (e.g., *1, *6, *7, *24, *46, *48).

      During Fiscal Years 2001-2005, MARAD was appropriated 0-$31 million for ship disposal (p. 21 of *15). Joel Gallob interviewed Alan Sprott and Alan Jones of Cascade General (*18, *23), and Gallob reports (*18)(boldface added):

      " 'Funding for shipbreaking,' said Alan Sprott, environmental manager for Cascade General company, a shipbuilding company in Portland, 'is sporadic. It depends on the whim of Congress. They allocated $21 million for 2006. But I've been told by International Shipbreaking' - one of the companies doing shipbreaking in Texas - 'that half of that money will go to the Navy because MARAD takes custody of some Navy ships, too.' The Navy has a parallel program, with a few contractors across the country approved to bid for ship disposal. 'So that leaves about $10 million, for all three of the MARAD (ghost) fleets, in California, Texas and Virginia. With $10 million you might get five ships scrapped,' warns Sprott. 'The rest of the ships will wait until Congress approves the money again. It's a poorly funded program, it's not dependable. It is not something to build a solid business model upon,' said Jones."

      However, Congress appropriated as much or more than MARAD requested during Fiscal Year 2003-2005, but not in 2002 (p. 21 of *15). So it appears that MARAD did not request enough funding to recycle more ships each year; for example, a U. S. General Accountability Office report in 2005 noted (p. 20 of *15)(boldface added):

      "In its 2001 report to Congress, MARAD provided a general estimate of costs to dispose of its inventory of 155 ships by the 2006 deadline, and it stated that it planned to further refine cost estimates as additional data relating to merchant-type vessels were collected during fiscal years 2001 and 2002. However, these costs were not converted into a long-term funding plan linked to disposing of all obsolete ships by 2006. In addition, MARAD did not revise its cost estimates based on actual contracting experiences. For example, the 2001 report estimated that it would cost about $350 million to scrap 140 of the 155 vessels--an average of about $2.5 million per ship--using ship scrapping services contracts. However, MARAD's budget requests for ship disposal for fiscal years 2002 through 2005 have totaled only $54.1 million, about one-sixth of the $350 million estimate."

      D. Risk of Too Few Ships to Recycle to Pay for the Cost of Constructing a Drydock or to Continue Ship Recycling

      D-1. MARAD May Dispose of Ships by Alternatives to Ship Salvaging

      MARAD is under Congressional pressure to dispose of obsolete ships (p. 2 in *15, p. 6 in *16). But MARAD is not required to do so only by contracting to domestic ship salvagers. While ship dismantling and recycling of scrap metal is currently the primary means of ship disposal, the number of ships available to shipbreakers may be reduced by other methods of ship disposal that are also forms of reuse or recycling. The General Accountability Office in 2005 recommended that MARAD consider using three alternatives to ship scrapping more (p. 26-27 and 31 in *15).

      The first alternative is sinking obsolete ships to create artificial reefs to "benefit marine life, commercial and sport fishing, and recreational diving" after some hazardous materials have been removed (p. 27-29 in *15). The RAND Corp. examined the costs of reefing ships in 2001 and found it would be much less expensive for MARAD than domestic ship recycling (p. xv in *55). There are financial obstacles and environmental concerns as well as benefits in creating artificial reefs by sinking these ships (p. 28-29 in *15, p. 17-18 in *42, Chap. 5 in *55). MARAD only disposed of one ship by reefing during Fiscal Years 2001-2005 but has received applications for five ships (p. 27-28 in *15). In October 2005, MARAD continues to examine ways to use this alternative (p. 7-8 of *35). [Addendum. On 1 June 2006, it was reported that the Northern California Oceans Foundation wanted MARAD to take its Suisun Bay obsolete ships, clean them of toxic substances, and sink them as reefs near San Francisco Bay (*70).]

      The second alternative to ship salvaging is deep-water sinking of ships during weapons testing or military training, with environmentally hazardous materials removed beforehand (p. 29-30 in *15). However, some environmental concerns similar to those for sinking ships to create reefs remain (e.g., see p. 18-19 in *42). The General Accountability Office stated that "MARAD has set a goal of disposing of one or two ships a year through this method" (p. 29-30 in *15). MARAD's October 2005 report also indicated that deep-water sinking of 1-2 MARAD ships per year is possible (p. 9 in *35).

      The third alternative is donation of ships to groups "interested in acquiring and preserving ships that have historic significance" (p. 30-31 in *15). MARAD did not donate any of its ships during 2001-2004 but is exploring ways to make it easier to do so (p. 30-31 in *15, p. 8 in *35).

      D-2. Competition from Domestic Ship Recyclers

      Even if MARAD does not use alternatives to ship scrapping, a ship recycling company in Coos Bay is not guaranteed to get all or even most obsolete MARAD ships from Suisun Bay, California. Some of MARAD's ships at Suisun Bay have already been towed to Brownsville, Texas and scrapped. For example, in 2005, five MARAD ships were transported to three Brownsville ship recyclers (*14, *17), and former Navy commander Gary Whitney has towed ships from Suisun Bay to Brownsville (*22, *27, *60). [Addenda. In October 2005, MARAD reported that eight vessels from the Suisun Bay fleet had been disposed of without a West Coast shipbreaking facility (p, 12 of *35). In 2006, MARAD plans to remove an additional 7 ships from their Suisun Bay fleet (*67). On 15 June 2006, it was announced that MARAD had awarded the recycling contract for four more Suisun Bay ships to two Brownsville shipbreaking companies for a total of 9 since October 2005 (*71).]

      Whitney is also working to re-open the drydocks at the former Navy shipyard at Mare Island near Suisun Bay to scrap MARAD ships with his company, Allied Defense Recycling LLC (*25, *26, *27, *28, *60). To do so, it has been estimated that it might cost $10 million initially for dredging and then as much as $2 million a year later (*25, *27). He has been unable to get the funding (*60). [Addendum. On 1 June 2006, Whitney is reported to have bid on the contract to scrap four MARAD ships from Suisun Bay at Mare Island drydocks *70), but he must have not been competitive as MARAD awarded the contracts to two Brownsville ship recycling companies (*71).]

      TABLE 1.  Financial competitive advantages and disadvantages of a Coos Bay ship recycling company relative to Brownsville ship recyclers.  There may be additional ones as well.  This Table is derived from Appendix A

      Advantage for Coos Bay                              

      Disadvantages for Coos Bay

      Lower Towing Cost from Suisun Bay                                                                          

      Lower Value of Scrap Metal
      Higher (?) Labor Costs            
      Weather-caused Delays and Rainfall
      Initial Dredging Costs
      Drydock Construction Costs
      Drydock Operation Costs

      It is questionable that a Coos Bay ship recycling company with a drydock could compete with Brownsville ship recyclers. A Coos Bay company would have one competitive advantage--lower towing costs, but it also has several disadvantages (Table 1). Some of the disadvantages are detailed in Appendix A and include:

      1) Prices paid for scrap are higher for Brownsville shipbreakers (section E).

      2) Wages are a critical part in being competitive, and many Brownsville workers are paid $7-7.50 hour without health benefits; the average wage has been reported to be less than $17,000 per year, which would be about $8.17 per hour (footnote c in Appendix A). A bilingual supervisor of more than 120 laborers earned only $40,000 in 2005 (*6). [Addendum. A Metro Machine executive "believes that Texas wages top out at $9 an hour" (*68).] A very large labor pool is available to Brownsville ship recyclers as shipyard workers in Mexico earn only about $50 a week, but they can make much more in Brownsville (*6). As many as half of Brownsville shipbreaker workers live in Mexico and commute to Brownsville under various labor programs (*6). Ship dismantling is labor intensive; for example, a mid-range MARAD ship at Suisun Bay of 7,500 tons may take 75,000 hours to scrap (footnote c in Appendix A). To be competitive, a Coos Bay recycler could not afford to pay much more than in Brownsville, since $2 more per hour without health benefits could be estimated to cost about $150,000 more for a 7,500 ton ship.

      3) A Coos Bay company would have weather-delays and rainfall costs that a Brownsville ship recycler would not (footnote f in Appendix A).

      4) A Coos Bay shipbreaker would have initial costs of dredging to the drydock site that may be several million dollars (footnote g in Appendix A).

      5) A Coos Bay company would have the costs of paying for a drydock that Brownsville ship recyclers do not (footnote h in Appendix A).

      6) A Coos Bay ship salvager would have higher costs for operating a drydock than Brownsville ship recyclers using in-water shipbreaking (footnote i in Appendix A).

      In a 2005 interview with Alan Jones and Alan Sprott of Cascade General, Joel Gallob wrote (*59):

      "So even though there is a higher cost for towing the mothballed vessels from Suisun Bay through the Panama Canal to Brownsville, the labor cost and scrap metal market numbers, Jones and Sprott say, make Brownsville a cheaper place for shipbreaking."

      Cascade General should know as they have a drydock and lost a competitive bid in 1999 for scrapping a Navy frigate to International Shipbreaking Ltd. of Brownsville, whose bid was less than 50% of Cascade General's (*44). Presently, Cascade General is not interested in doing shipbreaking because it is too risky financially, and they cannot compete with Brownsville shipbreakers (*17, *18, *19, *59).

      [Addenda. On 8 May 2006, Metro Machine that had recycled 18 Navy ships in a Philadelphia drydock announced that it would be closing, and competition with International Shipbreaking Ltd. in Brownsville was cited as one of the reasons for its closure (*65, *68). A May 14 article in a California newspaper states; "Two empty dry docks in the [San Francisco] Bay Area could handle ship recycling, one on Mare Island in Vallejo and the other at the former Hunters Point Naval Shipyard in San Francisco where the Navy cut up three frigates in 2000 and 2001. But even with their proximity to the Suisun fleet, strict environmental regulations, state toxic waste requirements and labor costs make those locations likely money losers, one expert said. 'We can't compete with Texas where they pay minimum wage,' said Werner Hoyt, an engineer who has worked in the ship recycling industry. 'The guys in Brownsville can bid against us and absorb the cost in reduced labor' payrolls."]

      If MARAD, the Navy, or the U.S. Congress decides to require all recycling of MARAD and Navy ships to be done in drydocks and the Congress provides the funds needed to do so, then a Coos Bay ship recycler may be more competitive. However, it seems doubtful that such legislation that would hurt Texas shipbreakers would pass because they have legislative clout (e.g., *61) and funding is currently inadequate (section C). Further, MARAD is not requesting ship recycling be done only in drydocks (*35).

      In the National Defense Authorization Act of 2001, the U. S. Congress required MARAD to dispose of ships at "the best value" and "at the least cost to the Government" (p. 1 of *42). MARAD would violate this Act by awarding ships to a Coos Bay facility if its bids were higher than those of the Brownsville facilities.

      Proper disposal of MARAD and Navy ships is a federal funding problem (section C). Will Coos Bay or Oregon taxpayers subsidize a Coos Bay shipbreaker to make it more competitive with Brownsville ship recyclers?

      D-3. After the Current Backlog of MARAD Ships Is Gone, Few Additional MARAD Ships Are Predicted to Become Available

      For a ship recycling facility to survive, it will need a steady supply of ships after the current backlog of MARAD ships is depleted. During four Fiscal Years from 2001 to 2004, the U.S. General Accountability Office found that there was a total average of 10.5 obsolete vessels per year (range 2-20 vessels) being transferred into MARAD's three fleets in Virginia, Texas, and California (p. 15 in *15), so the number added to just the California fleet at Suisun Bay could be expected to be less than that. Further, in 2001, MARAD estimated that after their current backlog of ships is gone that "an annual scrapping rate of about 6 ships per year is expected" (p. 10 of *42)--this again would be for all fleets.

      If a ship recycling company is only viable for a few years, how will the costs of building a drydock be paid for?

      D-4. Foreign Recycling of Obsolete U. S. Government Ships

      The number of government ships available to a Coos Bay recycling company would predictably be reduced if foreign export is permitted again. From 1983 to 1994, MARAD scrapped almost all of 200+ vessels by sales to foreign companies (p. 7 of *15). In 1993, the EPA advised MARAD that the Toxic Substances Control Act (TSCA) applied to the export of government vessels containing PCBs, and during 1998-1999 there was a moratorium on overseas recycling of government ships because of environmental and worker health and safety issues (p. 11-12 of *16, p. 13-14 of *42, p. 8-9 in *52).

      In 2003, MARAD awarded a contract for 13 vessels to be recycled in England at Able UK, and four of those vessels were towed there (p. 5-6 in *35). This transaction resulted in lawsuits and was controversial domestically and in England (*21, p. 5-6 in *35, *54). In March 2006, 18 months after the four vessels were towed to England, they remain moored, and their fate is unknown (*54).

      Denny Vaughan of Environmental Recycling Systems has expressed an interest in constructing a graving drydock in Coos Bay to recycle ships (*30). In 2004 and 2005, he was negotiating with MARAD to recycle all obsolete ships from MARAD's California, Virginia, and Texas fleets in Turkey and Mexico (*29):

      "The federal government is moving forward with a tentative deal to send all the remaining obsolete James River Reserve Fleet ships to recycling yards in Turkey or Mexico at a reduced cost. All the rotting ships in the James River ghost fleet could be gone in two years if the proposal succeeds, said Denny Vaughan, senior partner with Environmental Recycling Systems, a shipyard in Turkey that is coordinating the plan.
      "The James River fleet currently has about 55 obsolete ships. Vaughan's group is also offering to dismantle 77 ships in reserve fleets in Texas and California.
      "It's far from a done deal. Environmental Recycling Systems must compete with other shipyards vying for the recycling work. And the foreign deal needs approval from the Environmental Protection Agency, which would have to waive federal laws that forbid exporting hazardous waste.
      "Environmental Recycling Systems is offering to dismantle the ships in the Texas and California fleets for free, and charge only preparation, pre-cleaning and towing costs for the James River fleet ships, Vaughan said.
      "The Turkey-Mexico proposal has been in the bidding process for about two years.
      "Environmental Recycling Systems is a shipyard near the Aegean Sea in Aliaga, Turkey, and has a coalition of 29 additional yards interested in taking American ships. Dismantling ships in developing countries is cheaper because of lower labor costs and high demand for the ships' metal, boilers and generators, said Vaughan, a retired Navy rear admiral.
      "Vaughan would not disclose the exact locations of the Mexican shipyards in the proposal, other than saying they were on the country's east and west coasts."

      As part of the lawsuit against MARAD and the U.S. Environmental Protection Agency (EPA) to remove MARAD vessels from Virginia but not necessarily to ship them to Environmental Recycling Systems' facilities in Turkey and Mexico (*29):

      "An EPA spokeswoman said that the agreement has been reached in principle, but not all the parties have had a chance to sign the settlement. A Maritime Administration spokeswoman did not respond to requests for information.
      "In the settlement, EPA agreed to process, 'without unreasonable delay,' the Maritime Administration's request for a waiver to the Toxic Substances Control Act, which bans the export of solid PCBs.
      "The administration is seeking the waiver to move ahead with sending the remaining nine James River ships that are part of the Able UK deal to England. The Maritime Administration, known as Marad, also agrees, 'without unreasonable delay,' to award contracts for removing the remaining reserve fleet ships and to apply for more EPA waivers as needed."

      In March 2005, Brownsville shipbreakers were concerned that the Bush Administration will seek exemptions and resume export of MARAD ships overseas to recycle because of recent trips by Bush aides to China's shipyards (*6).

      [Addendum. On 25 May 2006, ERS was also reported to be partnering with a Mexican ship recycling company to scrap U.S. government vessels (*69), so ERS' commitment to shipbreaking in Coos Bay seems questionable.]

      There are obstacles to exporting MARAD's ships, but MARAD continues to lobby for exporting obsolete vessels as recently as October 2005 (p. 5-6 and 11 of *35).

      D-5. Foreign Recycling of Commercial (Private) Ships

      A ship recycling company in Coos Bay could theoretically augment an inconsistent supply of government ships to salvage with private/commercial vessels as Denny Vaughan has suggested (*30). However, the Toxic Substances Control Act does not prohibit the export of commercial ships (p. 11 in *16). Private ships continue to be generally exported to be recycled (p. 16 in *42, p. 18 in *55). In spite of higher towing costs, foreign ship salvaging is more economical because of lower labor costs and higher demand and prices for scrap (*29, *51). The RAND Corp. also notes that overseas ship recyclers, especially those in Asia, recycle and reuse more equipment and materials than U.S. recyclers (p. 113 and 126 in *55).

      E. Risk: Higher Scrap Prices in Brownsville and Variable Scrap Metal Prices

      Shipbreaking firms make money by selling scrap (especially steel) and reusable materials (Appendix B in *55). Excluding submarines, the RAND Corp. estimated that 79-90% of Navy and MARAD ships of various types would be ferrous scrap (i.e., containing iron), 0-4% aluminum, 1-4% copper or copper alloys, 0-4% lead, and about 9% waste (p. 124 in *55).

      FIGURE 1. Average monthly U.S. prices for Heavy Melting No. 2 Steel Scrap. This is from a RAND Corp. report (p. 138 in *55). There are more than 100 classes of scrap, depending upon the size and source (p. 137-141 in *55), and prices differ among classes. Note the monthly variability in prices and also that West Coast prices in Seattle and San Francisco were consistently lower than in Houston.


      A Coos Bay shipbreaking facility would be able to sell scrap metal, but it is predictable that the prices it would receive would be less than for Brownsville ship recyclers, so a Coos Bay facility would be less competitive (Appendix A).

      The value of scrap varies with location (Figure 1). For example, the RAND Corp. reports that the price is directly related to the proximity to where the scrap will be processed and that the price for Heavy Melting No. 2 Steel Scrap in August 2000 was about $60 per ton greater in Houston (which is near Brownsville) than in Seattle or San Francisco (which are near Coos Bay) (Figure 1). Further, International Shipbreaking Limited wrote in 1998 (*51):

      "Ship scrappers in the Gulf Coast area of the United States currently receive approximately $180 of revenue per ton for scrapped vessels. This is the highest scrap market price in the nation due to the proximity to so many mini-mills in the United States and Mexico."

      Additionally, in a 2005 interview with Alan Jones and Alan Sprott of Cascade General, Joel Gallob wrote (*59):

      "The market for scrap steel is not uniform across the country. Steel fetches $100 per ton more on the Gulf Coast than on the West Coast, Jones explained, because a lot of Mexican mills are competing for the metal. 'Say that's $260 per ton there versus $150 per ton in this area, that makes a big difference when you're talking about a 10,000-ton ship,' says Sprott.' "

      If a ship recycling company is distant from high scrap prices (e.g., along the Oregon Coast), not only may it receive less for its scrap metal, but it may have higher transportation costs to transport the scrap to market. Such a company would have a more challenging time competing in bids for MARAD or Navy ships with ship recycling companies in Brownsville that are closer to markets with higher scrap prices.

      Another risk for a Coos Bay shipbreaking facility would be that the scrap steel price may drop after it has been awarded a contract. For example, scrap steel prices dropped duri

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