Ship Breaking
By Christopher S. Stewart

(FORTUNE Small Business) – The most successful operator in the ship-scrapping world looks nothing like the grizzled, oil-stained breakers that have traditionally populated the industry. Kevin McCabe, the founder of International Shipbreaking Ltd. in Brownsville, Texas, has smooth, uncallused hands, a face that burns easily, and a penchant for ironed polo shirts. Unlike many of his competitors, who emerged in the mid-1960s, McCabe is a newcomer to the rough-and-tumble industry that chops up decrepit vessels the size of football fields and sells the raw material for scrap. Just eight years ago, drawn by what he assumed was a fail-safe investment opportunity, he left his job at a New York City securities company and with two partners poured $2 million into starting his new business. His friends called him crazy. "The joke is that I always wanted to be a shipbreaker," quips McCabe, who just turned 50. "The truth is, I knew nothing about it."

McCabe's early years in shipbreaking were plagued by bad breaks. From 1997 to 1999—when scrap steel prices plunged from $145 a ton to $70—ISL lost more than $3 million and reduced its staff from 170 to a skeleton crew of 15. On Christmas Eve in 1997, a one-ton slab of iron fell from a crane and killed a metal cutter. In the next couple of years the company suffered two more deaths. Its injury rate averaged above 40 a year, which topped most others in the industry and attracted the attention of regulators and the news media. One partner dropped out. Yet in 1998, on the verge of bankruptcy, he says, McCabe personally invested $2.25 million more in high-tech equipment and an additional 16 acres of land. "Once we dove into the pool," he says, "it was hard to get out."

That investment made ISL the largest and most technologically advanced breaker in the country, a status that is helping the company finally emerge as an industry leader at just the right time. In 2002, ISL scrapped three ships for total revenue of $8 million; this year McCabe expects the company to dismantle ten ships and bring in more than $20 million. Prices for scrap metal—sales of which account for one-third of ISL's revenue—have climbed again, to around $240 a ton, thanks to China's growing appetite for building materials. And best of all, ISL has broken out as the company best able to take on a new job from the federal government: disassembling a gaggle of 130 rusting hulks known as the Ghost Fleet.

Most of the Ghost Fleet dates to World War II, and its rusting hulls have floated sadly for more than 50 years in Beaumont, Texas; Suisan Bay, Calif.; and the James River in Virginia. Not long ago these obsolete behemoths were dragged to places such as India and China, where thousands of shoeless and shirtless laborers wielding oxyacetylene torches and hammers slashed away at the decaying hulls with little concern about the hazards to themselves, or the asbestos, oil, PCBs, and other toxins leaking into the ocean. But in 1999, in the face of growing concerns about workplace safety and pollution (not to mention U.S. employment), the U.S. government secured funding for a ship-breaking program. In 2001, Congress mandated that every ship in the Ghost Fleet be removed by 2006. Since then, $41 million has been allocated to the Maritime Administration (MARAD) to get the job done. Over $5 million of that money has gone to ISL, more than any other U.S. firm has received.

McCabe is beginning to prove what experts have been trying to establish for years: The world of shipbreaking must evolve. "With the mandate and the government money, there is a thought that yes, let's be more creative, let's put money into technology and change," says Ray Lovett, who is head of the Philadelphia-based industry think tank Ship Recycling Research Institute: "Some of these shipbreakers are stuck in low tech, and it might be their end. They need to get out of this cycle if they want to survive." Alan Roberts, who has worked with several shipbreakers in his job as director of the National Environmental Education and Training Center in Indiana, Pa., says that ISL has "a better operation than any other contractors at this point in time."

Looking around McCabe's 43-acre plant, it's easy to see the appeal of his approach. In the late 1990s, while competitors were using torches, ISL acquired a couple of pairs of metal shears, giant scissors that cut down on labor costs. Rather than carting aluminum scrap away in chunks, ISL melts it down from ship decks by using a high-temperature smelter, and the resulting product brings in a higher price per ton. Unlike other breakers, ISL doesn't contract out any work. It uses its own trucks to cart away dangerous elements, such as asbestos and PCBs. Any diesel oil found in ship hulls is reused. Every day, clean blue jumpsuits are issued to workers. And around the yard, where temperatures sometimes hover near 100 degrees in the summer months, there are enough coolers of electrolyte-spiked water to hydrate a desert army.

Today ISL, which sits on a muddy, man-made channel that stretches for 12 miles before emptying into the Gulf of Mexico, can handle as many as nine vessels at once; most of ISL's competitors can take on only one to three at a time. The average 550-foot vessel that comes in, such as the U.S.S. Gridley, a guided-missile cruiser recently towed up the channel to the yard, takes six months to dismantle. The process works something like this: When a ship arrives, men in moon suits and respiratory gear clean out all the deadly toxins. After that, dozens of cutters come onboard with torches and metal shears and carve away at the superstructure, including the captain's perch, artillery nests, and radar equipment. Magnet-equipped cranes remove metal chunks the size of car hoods. Finally, the "canoe"—an industry term for the gutted hull—is dragged up to a sandy slip and sliced like a loaf of bread. Throughout the process, scrap is loaded onto railcars and sold to recycling mills all over the world, including China and Mexico.

Though they have some civilian business, ISL and its domestic competitors depend heavily on the government for their livelihood. The good news is that 45 ships are expected to be added to the Ghost Fleet in the next few years. The bad news is that the dismantlement money isn't endless. After approving a $31 million allotment last year, Congress cut the 2004 MARAD breaking budget to $16.2 million.

The uncertainty doesn't seem to faze McCabe, as he wipes sweat from his forehead and watches a crane lift away a tangled mess of metal from the guts of a ship. "We'll have our on years and our off years," he explains. "We're not going for home runs. Think of it as a singles game."