Opportunities for Brazil
Maritime transport plays a vital role in international trade, with vessels responsible for handling 80% of the world's cargo, according to the United Nations Conference on Trade and Development Report "Review of Maritime Transport 2020".
However, as with all equipment, vessels have a limited life cycle after which they are no longer useful.
An average of 800 vessels are dismantled annually, which demonstrates that the final disposal of these assets is a significant market with a more stable demand than, for example, the construction market. In addition, it is a global market.
There is no correlation between the flag of the vessel or the location of operation of the assets and the location chosen by the shipowners for dismantling. On the contrary, in 2020 approximately 90% of the global tonnage dismantling was undertaken by only three countries (India, Bangladesh and Pakistan).
There are several opportunities for Brazil to enter this market, particularly due to the following factors:
- location of assets to be recycled – a way to compete with the low costs offered by shipyards in South Asia would be to avoid the logistical costs of transporting units operating in Brazil to such distant locations;
- rapidly growing demand – Brazil has a fleet of cabotage ships with an average age of 15.5 years, according to data from the National Waterway Transport Agency, so a large number of vessels may be recycled between 2032 and 2039. In addition, Brazil has a large fleet of offshore units already out of operation and an estimated 102 platforms to be decommissioned in the next 10 years, creating an opportunity for them to be recycled in Brazil;
- necessary infrastructure – Brazil already has modern and large shipyards, which suffer from a low-occupancy rate due to the reduced demand for new constructions; and
- practice aligned with environmental, social and governance – currently, there is a lot of national discussion about the adoption of environmentally friendly practices, especially through a circular economy. Recycling ships, if done correctly, is a great example of implementing this concept.
It is estimated that 80–90% of the materials extracted from vessels in the dismantling process (especially steel, iron and other equipment) can be recycled, thus reducing the environmental impact of the production of new parts and pieces.
Despite the aforementioned opportunities, the successful development of this market in Brazil depends on overcoming various obstacles, both nationally and internationally.
Internationally, a level of fair competition must be established among the shipyards that currently dominate the market.
In this sense, companies' growing awareness of their social and environmental responsibility usually encourages shipowners to carry out due diligence and elect shipyards with more restrictive and responsible compliance and governance policies, thus creating an opportunity for Brazilian shipyards.
In addition to this effort, the adoption of conventions and other international mechanisms can contribute to shipowners' decision making. An example is the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Deposit, which is relevant because ships which are to be dismantled often have several types of hazardous wastes, including asbestos in some cases. However, this convention does not apply to vessels in operation, only vessels whose imminent destruction has already been notified to the competent authorities by the vessel's owner.
In this context, the European Union developed the Ship Recycling Regulation (1257/2013). The regulation is based on the Hong Kong Convention and establishes that shipowners can send their EU-flagged ships only to certified shipyards, which may or may not be located in Europe. There are currently 39 such certified shipyards, none of which are in the Americas. Thus, there is an opportunity for Brazilian shipyards to become certified and get involved in recycling national and foreign vessels.
However, there are still tax and customs barriers for national shipyards to be economically competitive. For foreign vessels to be dismantled in Brazil, under current legislation, they would need to be definitively imported, levying taxes of up to 50% of the assets' value. Also, the importation of used goods involves a non-automatic licensing procedure which is usually denied by the Foreign Trade Authority.
As regards foreign vessels and platforms that are already in Brazil, the vast majority are supported by a special customs regime that provides the benefit of the total suspension of federal taxes levied on imports for assets operating in oil and gas exploration, development and production activities in Brazil for a limited time frame (ie, in general, those assets must be exported by the end of customs regime term).
In such cases, the termination of the regime through the destruction of the asset, instead of exporting it, can be requested. The destruction process must be approved and monitored by the Federal Revenue of Brazil and the Brazilian Institute of Environment and Natural Resources, thus generating additional bureaucracy.
In addition, the residues that may be marketable according to the Federal Revenue of Brazil (the objective is for up to 90% of the materials to be reused) must be imported, and taxed accordingly, or exported.
Therefore, if Brazil wishes to invest in this market niche, specific legislation should be studied to reduce the administrative burden that ship recycling can create.
Ship recycling can be carried out in a safe and sustainable manner. Brazil has the capacity to participate significantly in this market, subject to regulatory improvements that would make the activity reliable, safe and competitive. In this sense, Bill 1584/21 by Deputy Coronel Armando as well as the Brazilian Society of Naval Engineering's technical note on ship recycling in Brazil are good starting points for this discussion.
For further information on this topic please contact Juliana Pizzolato Furtado Senna, Jeniffer Adelaide Marques Pires Cotta or Gabriel Penna Rocha at Kincaid | Mendes Vianna Advogados by telephone (+55 21 2276 6200) or email ([email protected], [email protected] or [email protected]). The Kincaid | Mendes Vianna Advogados website can be accessed at www.kincaid.com.br.