Lloyd's List Intelligence has reported that ship recycling levels in 2024 reached the lowest point since 2005. The decline was driven by several interconnected factors, including increasingly difficult economic, financial, and regulatory environments.

Added to these factors, a significant driver of this trend was the difficulty developing countries faced in obtaining letters of credit (L/Cs), which play a critical role in facilitating ship recycling transactions.

Lloyd's List Intelligence is part of Lloyd's List, one of the oldest and most respected maritime news and information services in the world.

L/C challenges

Ship recycling, especially in developing countries like India, Bangladesh, and Pakistan, relies on financial instruments like L/Cs, but these countries have faced growing challenges in securing L/Cs due to banking and liquidity issues.

Tight liquidity last year limited banks' ability to issue L/Cs while macroeconomic pressures, including inflation, currency depreciation, and dwindling foreign exchange reserves, constrained their financial capacity.

Increased risk perception

Global banks meanwhile perceived higher risks in financing transactions in these countries, especially for industries like ship recycling that are associated with environmental, social, and governance (ESG) concerns such as labour practices. Shipowners may delay scrapping to find compliant yards, reducing overall recycling activity.

Financial institutions are also under increasing pressure to comply with international anti-money laundering and counter financing of terrorism regulations. This scrutiny can delay or deny L/C issuance.

Geopolitical and supply chain disruptions

Geopolitical tensions, like the Russia-Ukraine war, and disruptions in global trade and supply chains have also reduced overall vessel turnover, indirectly impacting recycling levels.

The Covid-19 pandemic meanwhile caused significant economic strain in developing countries, exacerbating financial difficulties and tightening credit markets.

Impact of L/C challenges

Without reliable access to L/Cs, shipbreaking yards in developing countries cannot secure the funds to purchase vessels for recycling, which last year led to a decline in activity.

Many yards operate on tight margins and depend on upfront financing provided by L/Cs and the lack of this financial instrument during 2024 forced some to reduce operations or shut down temporarily.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.