Highlights
- Three months after implementation of the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (Hong Kong Convention), its effects are becoming increasingly evident across the maritime industry.
- The Hong Kong Convention imposes new requirements on ship recycling facilities and shipowners as part of overall efforts to improve worker conditions and reduce the impact of ship recycling on the environment.
- Contracting states include several countries with significant maritime industries such as Denmark, Germany, Japan, Liberia, Malta, the Marshall Islands and Panama, as well as major ship recycling operations, including Bangladesh, India, Pakistan and Turkey.
The Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (the Hong Kong Convention) went into effect on June 26, 2025, in 24 contracting states. The Hong Kong Convention aims to improve worker conditions and reduce the impact of ship recycling on the environment. Contracting states are obligated to adhere to safe practices regarding the handling and disposal of hazardous materials in the ship recycling process. Three months into its implementation, its impact is becoming increasingly felt across the maritime industry.
New Requirements for Ship Recycling Facilities and Shipowners
The Hong Kong Convention requires ship recycling in contracting states to be conducted at authorized facilities. To become an authorized facility, ship recycling yards must prepare a Ship Recycling Facility Plan to protect the health and safety of workers and ensure proper handling and disposal of hazardous materials during the shipbreaking process. Ship recycling yards must also produce a Ship Recycling Plan for each individual vessel before it can be recycled.
The Hong Kong Convention applies to ships flagged in contracting states that are at least 500 gross tons and travel internationally. The Hong Kong Convention includes regulations that apply from the design phase through the ultimate recycling of vessels. Among other things, vessels subject to the Hong Kong Convention are required to maintain an Inventory of Hazardous Materials throughout the life of the vessel and verify compliance through surveys. Before a vessel is recycled, it must also undergo a final survey and be issued an International Ready for Recycling Certificate.
Global Reach
Contracting states to the Hong Kong Convention include several countries with a significant maritime industry, including Denmark, Germany, Japan, Liberia, Malta, the Marshall Islands and Panama. Contracting states also include major ship recycling countries, including Bangladesh, India, Pakistan and Turkey.
In Europe, the Hong Kong Convention is preceded by the European Union's Ship Recycling Regulation (SRR) and EU Waste Shipment Regulation, both of which remain in effect. The SRR, adopted in 2013, provides a stringent ship recycling framework on vessels flagged in an EU or European Economic Area (EEA) member state or whose calling port is in the EU or EEA. Among other ship recycling requirements, the SRR requires ships calling in a European port to maintain an inventory of hazardous materials onboard. The EU Waste Shipment Regulation, enacted in 2006 and revised in 2024, restricts certain exports of hazardous wastes to non-Organisation for Economic Co-operation and Development (OECD) countries, including those present on ships, and shipowners have faced significant fines or even jail sentences for failing to comply. Shipowners should note that the SRR, EU Waste Shipment Regulation and Hong Kong Convention each imposes obligations on covered vessels and shipowners. Certain shipowners will need to comply with multiple compliance regimes when recycling their vessels.
Though the SRR was effective in raising the standards and use of EU and OECD ship recycling facilities, its reach was limited by the ability to sell and reflag vessels out of the EU prior to the end of a vessel's useful life and, thus, in many cases avoided the SRR requirements. The Hong Kong Convention will have a greater impact on the global ship recycling industry, in large part because the three largest countries for ship recycling are contracting parties.
Impact on Ship Finance
Loan covenants in many credit agreements already required compliance with the Hong Kong Convention even before it went into effect. Below is a common credit agreement provision that incorporates this language:
"The Borrower shall maintain a policy that provides that each vessel owned by any member of the Group or sold to an intermediary with the intention of being recycled: (a) is recycled at a recycling yard which conducts its recycling business in a socially and environmentally responsible manner, in accordance with the provisions of The Hong Kong Convention and/or the EU Ship Recycling Regulation; or (b) to the extent that the Hong Kong Convention has not been ratified or otherwise is not yet in force at the time of such scrapping, the Borrower shall use best endeavors to ensure that such vessel is scrapped in compliance with the Hong Kong Convention and/or the EU Ship Recycling Regulation."
Shipowners and lenders should note, however, that the above covenant and similar covenants in many credit agreements may now require that a relevant vessel be recycled in compliance with the Hong Kong Convention regardless of whether the relevant vessel is flagged in a contracting state and that contractual covenants regarding ship recycling in their credit agreements may go beyond the requirements or reach of the Hong Kong Convention.
The Hong Kong Convention is already having an economic impact on both shipowners and ship recycling yards. Shipowners face additional compliance costs for their vessels to comply with the Hong Kong Convention, and ship recycling yards in contracting states now also face new compliance costs to become and remain authorized facilities. Lenders providing credit to older tonnage or specialist lenders who finance vessels intended to be recycled are being and will be more directly impacted by the entry into force of the Hong Kong Convention and resulting changes in the ship recycling industry.
Takeaways for Shipowners and Lenders
Though many existing financing arrangements already required compliance with the Hong Kong Convention prior to its entry into force, now that it has entered into force, all shipowners, lenders and industry participants should be aware of its requirements and global impact on the ship recycling industry. Parties, particularly those who may also be subject to the SRR and EU Waste Shipment Regulation, should consult with legal counsel to ensure compliance with all applicable laws.
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