The room for profit in China's ship recycling industry is likely to be squeezed by weak domestic scrap demand and the high cost of its "green" vessel-breaking methods this year, even though the government has offered favorable policies to encourage more vessels to be dismantled by 2015.

Ship recycling is an industry that supplies raw materials for infrastructure and capital projects in a number of sectors such as hydropower, bridge and railway construction works, particularly in developing countries. Ship recycling yards need to buy scrap ships from ship owners first before starting their business.

Wu Jun, vice-secretary-general of the Beijing-based China National Shiprecycling Association, said because China is taking action to scale down infrastructure and real estate investment while using restrictive measures to cut production capacity in its steel plants, the country currently doesn't need a large amount of scrap as a source of steel at the moment.

"Therefore, it won't be easy for Chinese ship-breaking yards to sell scrap even at a bargain price to the market this year," Wu said. "The previous high prices of both foreign and domestic scrap ships were another element that cut the profit margin of Chinese companies. Many of them have already reported financial losses for last year."

As a major global ship recycler, China dismantled 2.5 million tons of scrap vessels in 2013, up 4.6 percent from the previous year, according to the China National Shiprecycling Association.

The scrap price was traded between 2,450 and 2,650 yuan ($404 and $437) a metric ton in China in the first half of last year. But the price dropped to 2,300 yuan a metric ton in January, data from the China Association of the National Shipbuilding Industry shows.

China's ship recycling yards are mainly located in Zhejiang, Jiangsu, Shandong and Guangdong provinces. There are around 110,000 people working in the sector.

Because of cheap scrap prices, Wu said many ship-breaking yard owners would rather keep their scrap in storehouses, instead of selling it cheaply to steel plants.

To help China's shipping companies reduce the pressure caused by overcapacity over the past four years, the Chinese government issued a new subsidy policy to encourage the nation's shipping companies to reduce the number of aging vessels and replace them with technically advanced vessels last December.

The country will offer cash subsidies of 1,500 yuan per gross metric ton to shipping companies that scrap their vessels before their operational expiration dates.

The China National Shiprecycling Association forecast this policy is expected to dole out 4.56 billion yuan in subsidies for ship breaking.

Ship owners are entitled to receive 50 percent of the cash subsidies upon scrapping their vessels and the other 50 percent when a new replacement vessel is built. The owners of all aging ships scrapped between 2013 and 2015 qualify to apply for subsidies.

"This policy can only benefit ship owners and has no supportive effect on ship recycling yards," said Zhang Yongfeng, deputy director of the market research office of Shanghai International Shipping Institute.

Zhang said the government should consider offering encouraging policies such as tax cuts or more financial help toward steel-cutting equipment and materials in this sector because many ship-recycling companies bear heavy financial burdens in operating their businesses in an environmentally friendly manner.

China implemented rules to help bring the industry into line with international regulations and improve green technology in 2005 to further prevent both environmental and health damage caused by of a number of harmful substances typically used during shipbuilding process.

Zhang said Chinese ship recycling yards have been paying and adopting new technology to carry out their work, which involves higher costs for equipment, materials, storage and workers' protective wear.

In comparison with China, other major ship-breaking nations such as Turkey, India and Bangladesh are still relying on manual methods and outdated equipment to dismantle ships. Many scrap vessels are even dismantled on beaches.

"From a long-term perspective, Chinese ship-recycling enterprises will start to make a profit from China's ongoing ship-breaking benefits offered by the central government," said Yin Zhen, deputy director of the division of transport planning at the Institute of Comprehensive Transportation under the National Development and Reform Commission.

"What they need is simply a rebound in China's scrap prices when the country eventually finds new market growth points from the infrastructure and manufacturing sectors," Yin said.

Chinese shipping giants such as China COSCO Holdings Co and China Shipping Container Lines Co have already placed orders to add more advanced oil tankers and container ships to their fleets and made specific plans to dismantle old vessels in exchange for scrap subsidies to optimize their resources and open more shipping routes to emerging markets such as South America and Africa.

zhongnan@chinadaily.com.cn