Bangladesh’s Shipbreaking Industry Facing Mounting Challenges Amid Economic and Geopolitical Strain
Bangladesh’s shipbreaking industry, once a global leader in dismantling end-of-life vessels, is now facing an uphill battle against a wave of economic, regulatory, and geopolitical challenges. These challenges have converged to create a complex crisis in this once-booming sector, with local shipbreakers caught in a struggle to sustain operations amid a dearth of available ships, rising costs, and an uncertain market outlook. A recent update from the NGO Ship Breaking Platform, a global rights organization, highlights these difficulties and calls attention to the industry’s precarious situation in South Asia, specifically in Bangladesh.
The industry, centered in Chattogram (Chittagong), has historically been a vital contributor to Bangladesh’s economy, supplying a large proportion of the country’s steel needs and providing employment to thousands. However, disruptions in global trade, rising shipping freight costs, and the surging U.S. dollar have created unprecedented pressure on shipbreakers, leading to a significant downturn in operations.
Rising Dollar and Global-Local Market Discrepancies
The dollar crisis is one of the primary challenges weighing heavily on Bangladesh’s shipbreaking industry. The Bangladeshi Taka’s devaluation against the dollar has increased the costs of importing end-of-life ships, making it nearly impossible for many yards to procure vessels for dismantling. With the U.S. dollar now significantly stronger, the local currency’s decreased purchasing power has led to a sharp rise in operational expenses, diminishing the profit margins of many shipbreaking companies.
The NGO Ship Breaking Platform’s update indicates that this disparity between international and local markets has distorted purchasing power and affected the ability of yards to remain competitive. When shipbreakers in Bangladesh pay for ships in dollars, the costs are often higher than the prices they can charge in the local market for the scrap metal derived from dismantled vessels. This imbalance leaves businesses in a bind, with many struggling to justify the rising costs against lower profit margins in the local market.
Decreased Availability of Scrap Ships
Adding to the industry’s woes is a reduction in the global availability of scrap ships. As global freight costs continue to climb, fewer ships are reaching the end of their service life and being offered for dismantling. This is due in part to the increased profitability of extending the operational lifespan of older vessels, which have become more valuable for shipping companies amidst soaring freight prices. Consequently, there are fewer ships available for dismantling, leading to fierce competition for limited supplies and driving up acquisition costs for Bangladeshi shipbreakers.
NGO Ship Breaking Platform’s report underscores the economic impact of this shortage, stating that Bangladesh’s shipbreaking yards have been forced to reduce operations or close altogether as they are unable to secure enough vessels to sustain business. This crisis is hitting small- and medium-sized enterprises the hardest, which often lack the financial reserves to weather prolonged periods of inactivity.
Regulatory Constraints and Central Bank Oversight
The sector’s difficulties are further compounded by new regulatory constraints imposed by Bangladesh’s central bank. In response to the country’s currency crisis, the central bank introduced stricter regulations for issuing Letters of Credit (LCs), which are crucial for financing large international purchases, including scrap ships. As per the new guidelines, any LC exceeding $3 million requires approval from the central bank, a process that adds delays and limits flexibility in acquiring ships.
For the shipbreaking industry, these restrictions have caused significant bottlenecks. Businesses often operate on tight schedules and require quick decisions to seize opportunities in a highly competitive market. The additional approval requirement complicates this process, making it difficult for shipbreakers to react to market shifts and secure necessary financing. This has stifled business growth, and in many cases, stalled operations entirely. The report emphasizes that these regulations, although intended to safeguard national reserves, have inadvertently exacerbated challenges for the shipbreaking sector.
Geopolitical Tensions: A Global Ripple Effect
Geopolitical tensions have also played a role in amplifying the challenges facing Bangladesh’s shipbreaking industry. The report from NGO Ship Breaking Platform specifically points to the ongoing Russia-Ukraine war, recent escalations in the Israel-Palestine conflict, and a recent Houthi attack on a merchant vessel in the Red Sea as destabilizing factors that have influenced global shipping markets and trade dynamics. These conflicts have heightened uncertainty within the global maritime industry, causing delays and fluctuations in freight rates, which indirectly affect the availability and cost of end-of-life vessels.
Moreover, these geopolitical factors are driving up insurance costs for ships operating in conflict zones, adding an additional layer of financial burden. Many shipping companies, facing increased operational costs, are opting to extend the operational lifespan of vessels rather than scrapping them, further diminishing the supply available to Bangladesh’s shipbreakers. This ripple effect has left Bangladeshi shipbreakers increasingly cautious and unwilling to take on the risk of importing ships that might be caught up in the effects of these global tensions.
Shrinking Industry and Mounting Casualties
The combination of these financial, regulatory, and geopolitical pressures has led to an alarming contraction within the shipbreaking industry. According to NGO Ship Breaking Platform, over 50 shipbreaking yards in Bangladesh have shut down over recent years, with an additional 20 ceasing operations in just the past 18 months. This wave of closures has resulted in substantial job losses and has disrupted the supply chain for scrap metal, which plays a crucial role in Bangladesh’s construction and manufacturing sectors.
In addition to economic strain, the physical dangers associated with shipbreaking continue to plague the industry. The report highlights that between July and September of this year alone, five accidents at Bangladeshi shipbreaking yards resulted in six fatalities and 12 injuries. These incidents underscore the industry’s ongoing struggle with safety issues, as shipbreaking is one of the world’s most hazardous occupations. Despite some recent improvements in safety regulations, the industry still sees a high rate of workplace accidents due to inadequate safety protocols and a lack of resources.
Calls for Government Intervention
The NGO Ship Breaking Platform report warns that without meaningful government intervention, the survival of Bangladesh’s shipbreaking industry is uncertain. The industry’s advocates are calling for targeted support to mitigate the impact of the currency crisis and ease regulatory constraints. Such interventions could include measures to stabilize the exchange rate for scrap metal purchases, subsidies to offset rising costs, and revisiting central bank regulations that currently hinder LCs for large international transactions.
Furthermore, industry representatives are pushing for safety reform initiatives to prevent further fatalities and injuries on-site. With more robust safety measures, the sector could enhance its reputation globally and possibly attract new business. Improving safety and working conditions might also help attract skilled labor, which is crucial for sustaining operations in an industry known for its labor-intensive nature.
Uncertain Future and Global Implications
Bangladesh is not the only country facing these issues, but the scale and severity of the challenges in the Bangladeshi context are unparalleled. From an international perspective, the struggles of Bangladesh’s shipbreaking industry reflect broader shifts within global trade and shipping. As major shipping routes face interruptions due to geopolitical tensions and fluctuating freight rates, the trickle-down effects are being felt by industries dependent on maritime commerce, including shipbreaking.
With the number of dismantled ships rising slightly in the first half of 2024, there remains some optimism. However, the NGO Ship Breaking Platform report cautions that this uptick is unlikely to sustain the industry long-term without systemic changes and support. Of the 96 ships dismantled worldwide from July to September, 24 were broken down in Chattogram, a small increase that still does not address the overall downward trend.
The future of Bangladesh’s shipbreaking industry hangs in the balance, with both industry stakeholders and rights advocates urging swift and decisive action to address these multiple, intertwined crises. As one of the largest shipbreaking hubs in the world, Chattogram’s shipyards represent not only a major economic force within Bangladesh but also a critical link in the global supply chain for scrap metal.
