This letter has been reformatted for the Internet. First put on the Internet: 23 May 2006. Last Addendum: 18 Sept. 2006. Links Last Checked: 21 May 2006
Table of Contents for 23 May 2006 Letter [In the original, the Table of Contents was at the end of p. 1.]. [Some addenda of relevant material has been added inside brackets.]
As of Sept. 18, the only response to this May 23 letter to Rep. Peter DeFazio and Senators Gordon Smith and Ron Wyden has been a June 19 letter from Senator Smith.
[Start of Letter]
Possible Shipbreaking Facility in Coos Bay
Opportunities and Risks of Shipbreaking in Drydocks in Coos Bay and Elsewhere
Inadequate Funding of MARAD and Navy Ship Disposal Programs
The U.S. House's Directing MARAD to Try to Export MARAD Ships for Scrapping
Closing Remarks
Footnotes
The Honorable Peter DeFazio
Fourth District, U.S. House of Representatives
125 Central, Suite 250
Coos Bay, OR 97420
Dear Mr. DeFazio:
Re: 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.
I hope that you will not facilitate or help fund a shipbreaking facility or dredging for such a facility in Oregon until after the MARAD and the Navy ship disposal programs are consistently and adequately funded to support shipbreaking in drydocks. Otherwise, an Oregon shipbreaking facility of MARAD and Navy ships is likely to close or go bankrupt because of an insufficient or irregular supply of ships to scrap and competition with Brownsville ship recyclers for MARAD or Navy ships in California.
Your characterization of "our national policy" of ship scrapping during the 2000 House Committee Hearing on MARAD and/or Navy ship scrapping as "being penny wise and pound foolish" (footnote #18) still seems appropriate.
Thank you for your time and consideration.
Yours,
Range (Richard) Bayer; this letter is also at http://www.orednet.org/~rbayer/salvage/congress.htm [must use all lower case letters] to make it easier to look up footnotes.
cc: Senator Ron Wyden and Senator Gordon Smith
Enclosure: my 8 May 2006 letter to the Oregon International Port of Coos Bay (which is also available at http://www.orednet.org/~rbayer/salvage/coosbay.htm [must use all lower case letters] to make it easier to look up footnotes).
In November 2005, Bay Bridge Enterprises LLC of Virginia proposed to construct an in-water shipbreaking facility for MARAD ships in Newport. Last January 24, the Port of Newport turned down the proposal because the Port did not have the money for dredging and site preparation that the facility would require (#14, #15). On Feb. 10, it was announced that Governor Kulongoski indicated that shipbreaking in Oregon would have to be done to the environmental standards equal to that of ship recycling in drydocks (e.g., #5, #11). On Feb. 16-17, it was reported that Environmental Recycling Systems (ERS) and a second, unnamed company had expressed interest in shipbreaking in Coos Bay (#8, #10). In 2004 and 2005, ERS was negotiating with MARAD to export all of MARAD's obsolete ships in MARAD's Virginia, Texas, and California fleets to be scrapped in either Turkey or Mexico, and ERS was described as a shipyard in Turkey that had a coalition of 29 other yards in Turkey and Mexico (#7). In a May 20 Coos Bay World article by Elise Hamner (#26), ERS' Denny Vaughan in Seattle is described as partnering with Namik Idil in New York to line up investors from Turkey and Japan to help finance a shipbreaking facility at Coos Bay. [Addendum. On 25 May 2006, ERS was also reported to be partnering with a Mexican ship recycling company to scrap U.S. government vessels (#29), so ERS' commitment to Coos Bay shipbreaking seems questionable.]
At Coos Bay, ERS is proposing to build two graving drydocks to scrap "former U.S. military vessels" and "the potentially thousands of other privately owned ships, tankers and barges that are and will become obsolete" (#8). However, the Toxic Substances Control Act does not prohibit private/commercial vessels from being sent overseas to be scrapped like it does for government-owned ships (p. 11 in #4). Scrapping ships overseas is more economical because of lower labor costs and higher demand for scrap (#7), and most commercial ships are or are proposed to be scrapped overseas (#19, section D-5 in my enclosed May 8 letter). So it is questionable if private ships would be scrapped at Coos Bay.
On May 20, the Coos Bay World's Elise Hamner reported (#26) (boldface added):
"ERS has estimated it could spend from $12 million to $30 million to build two graving docks."
Note that this is the reported estimate of what ERS could spend--not the total cost of a ship recycling facility. The estimated cost of constructing one graving drydock at Newport was estimated at "$30 or $40 million, minimum" (#6). Environmental Recycling Systems' proposed Coos Bay facility was said to be comparable to an Ecodock (#8), and the cost of two Ecodock facilities in Europe has been estimated to be $72-79 million each (#16, #17). There would be additional costs to dredge a channel for large ships from the main shipping channel at Coos Bay to the graving drydocks. At Newport, it was estimated that dredging for Bay Bridge Enterprises' proposed in-water ship recycling facility would cost $3-12 million--this estimate did not include the cost of pile driving (#14, #15) that would be necessary for mooring one or more vessels before they enter a drydock.
Enclosed is my 19 page letter of May 8 to the Oregon International Port of Coos Bay that is also at http://www.orednet.org/~rbayer/salvage/coosbay.htm [must use all lower case letters] to make it easier to find footnotes. It discusses the ongoing need and opportunities for ship disposal (section A of my May 8 letter; "section" hereafter refer to sections in my May 8 letter). But there are also high risks for building a drydock to recycle ships (section B) because of insufficient federal funding (section C), competition with Brownsville ship recyclers for MARAD and Navy ships in California (section D-2), and variable prices of scrap metals (section E). The risks are why the domestic in-water or drydock shipbreaking industry has been so unstable with bankruptcies and closures (section B). Not included in my May 8 letter are statements by Frank Foti of Cascade General shipyard with a drydock in Portland for the May 2000 House Hearing that appear as true today as then (#19):
"To the uninitiated it may seem that without foreign competition, a domestic ship dismantling industry would be free to grow and reap the profits from the sale of scrap. Understandably, people look at a ship and perceive that it has a significant salvage value. The fact is though, that dismantling government vessels under the current structure is an extremely risky and speculative business. Oftentimes the dismantling costs are not quantifiable until well into the project. Older vessels are full of hazardous materials integrated into their construction. Removing and disposing of these materials, and providing for environmental protection and worker safety during the dismantling are very costly. Combine this with the volatility of scrap prices and the purchase, towing, and dismantling costs will typically exceed the scrap value of a ship. Because of this, domestic dismantlers have been bankrupted out of business to the point where there are only a handful left operating on dangerously thin margins. Most companies having the capabilities to dismantle ships, including Cascade General, would never take the financial risks these remaining dismantlers take."
After I mailed my May 8 letter to the Port, I read that Metro Machine would be closing down its drydocks at the old Philadelphia Naval Shipyard (#20 [also see #28]). The article (#20) stated:
"While rivals for Navy work were winching ships onto land to cut them up, 'we did the work in a dry dock so we could catch anything that spilled. We served the Navy well,' Metro president John W. Strem Jr. said. It scrapped 18 warships in Philadelphia. With the price of scrap steel rising, it had high hopes for building a ship-recycling business here, Strem said. But the Pentagon shifted much of its ship-scrapping work to International Shipbreaking Ltd., on the U.S.-Mexico border in Brownsville, Texas."
In effect, Metro's ship recycling in drydocks could not compete with the in-water ship recycling of International Shipbreaking Ltd. For bids awarded by the Navy during 2003-2004, the average cost per ton for Metro was $682/ton (N=6 ships, range $535-$854/ton) but averaged about half as much ($346/ton, N=4 ships, range $187-$451/ton) for International Shipbreaking (calculated from p. 20 of #9). Further, in 1999, Cascade General's bid to recycle a Navy ship moored in California at a Portland drydock was over twice as great as International Shipbreaking's bid (#13). In 2001, a company with a drydock at Hunters Point in California stopped recycling Navy ships because it was not financially feasible to continue as a consequence of inadequate government funding that resulted in too few ships to scrap (section C). In 2003, Baltimore Marine Industries, Inc. at the former Sparrows Point naval shipyard in Baltimore went bankrupt, in part because of an irregular supply of ships to scrap at its drydocks (section C).
Metro's closure comes at a time when scrap steel prices are high. In a May 14 article, it was estimated that a shipbreaking company may now make roughly $3.7 million per ship (#21). However, scrap prices go in cycles, and it is predictable that they will drop (section E). Then scrapping contracts for scrapping may be abandoned as noted in MARAD's 2001 report (p. 3 of #12):
"Since 1994, MARAD has sold 22 vessels, only eight of which have been scrapped. The purchasers did not accept the remaining vessels and most of the sales contracts were terminated. Key factors were the marginal profits stemming from ship scrapping, which were influenced by the constantly changing market prices for scrap metal versus the costs for removal and disposal of hazardous material."
Drydock shipbreaking is more expensive than in-water shipbreaking, and in-water ship recycling companies in Brownsville also have competitive advantages of higher scrap prices than would be available in Oregon (section E) and low labor costs (section D-2). After my May 8 letter, a May 14 article about possible ship recycling in the San Francisco Bay area stated (#21):
"Two empty dry docks in the 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."
Shipbreaking in drydocks is better for the environment and is recommended (#1). Yet drydocks are not given preference by the government for ship recycling. In 1999, the Navy's first technical review panel rated Cascade General with its drydock better than International Shipbreaking Ltd. with its in-water shipbreaking, yet a second review panel was created and rated them equally (#13). As a consequence, International Shipbreaking was awarded the contract because of its much lower bid (#13). Was International Shipbreaking's lower bid the ultimate reason why a second panel was created and rated International Shipbreaking equally with Cascade General?
Congress, MARAD, and the Navy are all working to have ship salvaging done as cheaply as possible rather than done to the higher environmental standards possible in drydocks [Addendum. The Congress directed MARAD to dispose of its ships at "best value" and "at least cost to the Government" (p. 8 of #3). The Navy also awards ships for shipbreaking on a "best-value basis" (#27).] A U.S. House Committee told MARAD in its Appropriations Bills for 2005 and 2006 to "promote aggressive competition among the domestic scrapping industry and international disposal facilities" (#23, #24) at the "best value to the taxpayer" (#23). It is unclear if federal or state governments are trying to monitor environmental issues at ship recycling sites because I have found no evidence that any federal or state agency inspected the in-water shipbreaking slip at Bay Bridge Enterprises in Virginia (#2).
How will a Coos Bay facility burdened with the additional cost of constructing new drydocks compete with in-water Brownsville ship recyclers if established shipyards with drydocks can not?
Several domestic ship recycling companies have stated that inadequate funding of the MARAD and Navy ship disposal programs lead to an inadequate number of ships for scrapping and instability in the industry (section C). The irregular supply of ships leads to periodic layoffs and loss of trained crews (section C).
Some recycling companies have blamed Congress for not better funding these programs (section C). On May 14, former MARAD Administrator John Jamian was also reported to have said that Congress did not give MARAD enough money to dispose of MARAD ships by the September 2006 deadline (#22). However, Congress appropriated as much or more than MARAD requested during Fiscal Years 2003-2006, but not in 2002 (p. 21 of #3, #25). The March 2005 U.S. General Accountability Office report noted that MARAD did not request enough money to scrap ships by the 2006 deadline (p. 20 of #3).
MARAD maintains that there is insufficient domestic capacity to scrap ships and proposes that some scrapping be done by foreign companies (section D-4). This policy follows the direction given to MARAD by the U.S. House. For example the House Committee Report for the 2005 Appropriations Bill for MARAD's ship disposal program stated (#23):
"The Committee supports international disposal of vessels to the extent that similar standards of domestic disposal are applied at international facilities. Further, the Committee notes the recent increased competitiveness of domestic scrapping operations and encourages MARAD to promote aggressive competition among the domestic scrapping industry and international disposal facilities for funds appropriated for disposal."
And the House Committee Report for the 2006 Appropriations Bill for MARAD's ship disposal program stated (#24):
"The Committee continues to encourage MARAD to pursue various disposal options, including international disposal. Further, the Committee notes the recent increased competitiveness of domestic scrapping operations and encourages MARAD to promote aggressive competition among the domestic scrapping industry and international disposal facilities for funds appropriated for disposal."
In contrast, the Senate Committee Report for the 2006 Appropriations Bill does not mention international disposal (#25), so it appears that the House is pushing more for export of obsolete government ships.
Congress and MARAD undermine the possibility for increasing domestic capacity. They do so by not seeking or appropriating more funds and by maintaining a policy of seeking to export ships. Consequently, domestic companies that could expand their capacity or domestic companies that have the facilities and capacity to enter the industry do not do so, since the risk to their investment is too great (section C, section D-4, and section H). Not included in my May 8 letter, the statement of Frank Foti of Cascade General shipyard in Portland for the May 2000 House Hearing still seems true (#19):
"The key to solving this problem economically is to provide private enterprise the opportunity to make a fair return without assuming exorbitant risk. The capacity already exists in the U.S. to dismantle all of the surplus vessels in MARAD's custody within a five to ten year period. Dismantling two to four surplus vessels per month is an achievable goal. There are reputable U.S. companies ready and willing to do this work if the Government were to adopt the appropriate strategy and provide the funding necessary to do it responsibly. Cascade General has a plan based on using existing infrastructure, that if executed tomorrow, would dismantle all of the obsolete vessels in MARAD's Suisun Bay Fleet inventory within five years. That is over one third of MARAD's total vessel stockpile. We are simply waiting for MARAD's disposal strategy to catch up with the reality of the situation. Other companies having the capabilities and facilities to dismantle ships are doing the same."
If Congress wants to reduce the backlog of obsolete MARAD and Navy ships and not just continue postponing deadlines as it has from 1999 to 2001 to 2006 to the next deadline, then Congress needs to recognize that blaming MARAD or the Navy is insufficient as Congress is also part of the problem. It is up to Congress to adequately fund the program, so that the domestic shipbreaking companies are not closing or going bankrupt.
Congressional increases in funding alone will not solve the problem if Congress and MARAD continue to undermine domestic ship recycling companies by threatening domestic companies with the possibility of exporting obsolete ships. Perhaps if Congress requires MARAD to dispose of all their ships domestically, MARAD may also abandon their efforts to export ships. Doing so would help strengthen domestic recycling companies by reassuring them that their capital investments to increase shipbreaking capacity or to make improvements will not be wasted like they would be if government ships may be exported for scrapping. It could also encourage other domestic companies to participate in the disposal programs and thus enhance domestic competition and thereby reduce costs.
Your characterization of "our national policy" of ship scrapping during the 2000 Hearing as "being penny wise and pound foolish" (#18) fits the U.S. Congress today because its inadequate funding and possible export policy have resulted in a continuing backlog of ships at a time when scrap steel prices are high. It is predictable that scrap prices will drop (section E), and when they do, it will be much more costly to dispose of ships.
Dollars spent to facilitate or fund a shipbreaking facility in Oregon would be better spent on increasing the funding of MARAD and Navy ship disposal programs. A shipbreaking company in Oregon is apt to have periodic layoffs before finally going bankrupt under current funding, Congressional and MARAD policies, and competition with Brownsville ship recycling companies.
#1. Advantages of drydocks: http://www.orednet.org/~rbayer/salvage/index.htm#error-margin [must use all lower case letters]
#2. No inspections of Bay Bridge Enterprises' in-water shipbreaking slip in Virginia: http://www.orednet.org/~rbayer/salvage/index.htm#slip-test [must use all lower case letters]
#3. United States Government Accountability Office (GAO). 2005. Maritime Administration: Improved Program Management Needed to Address Timely Disposal of Obsolete Ships. March 2005. GAO-05-264. Report to the Ranking Minority Member, Subcommittee on Readiness, Committee on Armed Services.
#4. Howard, Thomas J. 2000. Maritime Administration: Limited Progress In Disposing of Obsolete Vessels. May 24. Statement of Thomas J. Howard, Deputy Assistant Inspector General for Maritime and Departmental Programs, U.S. Department of Transportation, Before the Subcommittee on Coast Guard and Maritime Transportation, Committee on Transportation and Infrastructure, U.S. House of Representatives. Report No. MA-2000-097.
#5. Sleeth, Peter. 2006. No Welcome, No Shipbreaking. Ghost Fleet - Gov. Ted Kulongoski Says a Virginia Firm Cannot Scrap Old Ships in Oregon Waters, Only Dry-dock. Feb. 10, Portland Oregonian.
#6. Gallob, Joel. 2005. Winch vs. Dry Dock for Shipbreaking's Heavy Lifting. Dec. 23, Newport (Oregon) News-Times.
#7. Schleck, Dave. 2005. Deal Would Export 'Ghost Fleet' at Reduced Cost. July 19, Daily Express (Newport News, Virginia).
#8. Hamner, Elise. 2006. Issues Generate Waves of Interest. Feb. 17, Coos Bay (Oregon) World. This is available for a fee.
#9. U.S. Maritime Administration. 2005. Report to Congress on the Progress of the Vessel Disposal Program. October 2005. U. S. Dept. of Transportation, Maritime Administration.
#10. Bishop, Jeff. 2006. Proposal on Public Forums to Study the Pros and Cons of Ship Recycling. Statement at February 16, 2006 Meeting of Port's Board of Commissioners by Jeff Bishop, Executive Director, Oregon International Port of Coos Bay.
#11. Fuller, Brian. 2006. Fact Sheet: Ship Breaking Project Proposal for Coos Bay. April 3, Oregon Department of Environmental Quality--Eugene, Regional Environmental Solutions, Western Region. DEQ 06-WR-006. (Fuller emailed this as a DOC file. In transforming this into a smaller PDF file that can be quickly downloaded, the quality of the DEQ logo has diminished.)
#12. U.S. Maritime Administration. 2001. Report to Congress on the Progress of the Vessel Scrapping Program. April 2001. U. S. Dept. of Transportation, Maritime Administration. This does not appear to be available at MARAD's web site but is at http://www.cbc.ca/fifth/bigbreak/2001report.pdf
#13. Baxter, Kevin. 2000. Dismissal of Ship Repair Company's Plea Lets Warship Scrapping Get Under Way. March 1, American Metal Market.
#14. Gallob, Joel. 2006. Port Says No. Jan. 25, Newport News-Times.
#15. Casper, Beth. 2006. Newport Halts Plan for Ship Cutting. Commissioners Not Willing to Invest to Support the Business. Jan. 26, Salem Statesman Journal.
#16. Garfield, Geoff. 2005. Green Yard in Netherlands Gets Funding. June 10, TradeWinds (Norway)(an international shipping newspaper, http://www.tradewinds.no/subscribe/). This is at http://www.ecodock.info/uk/infobase_show.php?id=160.
#17. Garside, Ben. 2005. Shipbreaking Yard Eyed in Northeast England. Aug. 17, American Metal Market.
#18. U. S. Congress. 2000. Hearing Segment 2. Disposal of Maritime Administration Vessels. Hearing before the Subcommittee on Coast Guard and Maritime Transportation, Committee on Transportation and Infrastructure. House of Representatives, May 24, 2000.
#19. Foti, Frank J. 2000. Statement of Frank J. Foti, President and Chief Executive Officer, Cascade General, Inc., 5555 North Channel Avenue, Portland, Oregon 97217 before the U.S. House Transportation and Infrastructure Committee Subcommittee on Coast Guard and Maritime Transportation. May, 2000.
#20. Holcomb, Henry J. 2006. Shipyard to Close Facilities in Phila. The City Is Seeking Another Ship-repair Company to Lease Metro Machine Corp.'s Dry Docks at the Old Navy Yard. May 8, Philadelphia Inquirer.
#21. Peele, Thomas. 2006. Few Options for Scrapping Obsolete Ships. May 14, Contra Costa Times (California).
#22. Peele, Thomas. 2006. Suisun Bay Fleet Hardly Shipshape. May 14, Contra Costa Times (California).
#23. U. S. House. 2005. Committee Report 4 of 298 - House Report 108-671 - Departments of Transportation and Treasury and Independent Agencies Appropriations Bill, 2005. Ship Disposal.
#24. U. S. House. 2006. House Report 109-153 - Departments of Transportation, Treasury, and Housing and Urban Development, the Judiciary, District of Columbia, and Independent Agencies Appropriations Bill, 2006. Ship Disposal.
#25. U.S. Senate. 2006. Senate Report 109-109 - Transportation, Treasury, the Judiciary, Housing and Urban Development, and Related Agencies Appropriations Bill, 2006. Ship Disposal. (This was present on May 20, but not on May 21 and 22. I reported the error to the Library of Congress on May 22.)
#26. Hamner, Elise. 2006. Company Considers Coos Bay Option. May 20, Coos Bay World.
Relevant References That Were Added after the Original Letter
Addendum #27. Anonymous. 2006. Retired Navy Fleet Contains 67 More Ships. May 25, Coos Bay World.
Addendum #28. Hamner, Elise. 2006. Ship Recycling Sailing South. May 25, Coos Bay World.
Addendum #29. Anonymous. 2006. Mexico Firm Eyes U.S. Fleet. May 25, Coos Bay World.
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