It is known as the graveyard of ships, a place where ageing vessels are torn apart by unskilled labourers and the metal then sold on as scrap. In recent years these often deadly and dangerous ship breakers' yards, which stretch a full seven miles along the coastline of the Indian state of Gujarat, have themselves been a little on their uppers.

Booming demand for freight meant that it made sound economic sense to keep even older ships in operation, and many of the labourers in the Gujarati yards were laid off.

But now, by no small irony, these workers in the world's largest ship-breaking yard have been saved by the global recession. The economic downturn and a subsequent fall in demand for cargo ships has meant that for many ship owners it makes better sense to send an ageing ship to the scrapyard rather than to keep her maintained but idle.

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But while the recession may have been good news for the owners of the ship-breaking firms, it is very bad news for the environment. The scrapping of ships in South Asia – Bangladesh and Pakistan are also major scrappers – is a rudimentary, almost medieval affair. Ships are allowed to beach on the sands and then armies of men with little or no training pull apart the ships with hand-tools. Toxic substances such as mercury and asbestos are allowed to seep into the environment.

One of the attractions to the ship owners of having their vessels dismantled here is that the ship breakers in this part of the world receive little of the regulatory oversight that takes place in Europe or the US.

For the ship owners, it means they can dispose of their ships more cheaply, while for the scrappers it means bonanza-time.

Over the last 10 months, the scrappers at Alang in Gujarat have received and dismantled around 280 ships, up from 163 during the same period a year earlier. Some breakers believe that over a 12-month period from January, they might reach a total of 400 ships.

"The costs of a laid-up vessel are considerable. It costs a lot to keep it empty. If there is no cargo, it is better to lose them," said Nikhil Gupta, owner of the Hare Krishna Steel Corporation and a senior official with the breaker's trade organisation, the Ship Recycling Industries Association of India. Speaking by telephone, he added: "After 35 or 40 years these ships are not as safe, and the insurance premiums go up. In the past there was a lot of trade and it made sense to keep them."

Pat Swayne of the Baltic Exchange, the London-based maritime trading house, said there is no question that increasing numbers of older ships are being scrapped. "Previously many ships that were able to make a lot of money [for the owner], are now facing rising costs," he said. "If you decide to lay up a ship then you have to find somewhere to lay it up and the question is where do you lay it up? The older a ship is, the more costs are associated with it. Scrapping becomes a very viable option."

Since the mid-1980s, the vast breakers' yards at Alang have developed, under only loose regulation, along a stretch of coast that enjoys a tidal range of around 13 metres, making it easier to beach a condemned vessel directly onto the shoreline.

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Previously the industry was based in Mumbai, but gradually it moved to Alang and continued to expand. Now, Alang accounts for than half of all the ships scrapped worldwide, followed by Pakistan and Bangladesh, which each scrap almost a quarter of the remainder. Mr Gupta said that as a result of upturn in scrapping, up to 40,000 workers are now directly employed by the breakers at around 170 plots along the coast.

Around 130 plots are in use today, up from just 25 in 2006.

For those directly and indirectly involved in breaking, the cash tills are jingling and many breakers have recently been tempted back into the industry. In the surrounding area there has already been a visible impact on the area. New homes are sprouting along the 35-mile stretch of road that links Alang to the city of Bhavnagar, and the local roads are awash in what some call "snazzy sedans". On the edge of Alang a huge flea market has sprung up, selling multifarious equipment and fittings taken from the ships.

Locals say that when an owner decides to scrap a vessel, they rarely have the time or opportunity to make a full assessment of the value of such things. As a result, the flea market sells everything from ships motors and cutlery sets to fridges and lifeboats at bargain prices.

"Last year I bought a torque wrench here for about 3,500 rupees (£44), which would have cost me 50,000 on the open market," Vasant Pachal, an engineering workshop owner from the city of Vadodara, recently told The Hindustan Times while browsing at the market. "Apart from the great deals, I get to see the latest in technology every time I come here."

Yet for environmentalists and labour campaigners, the upturn in business means something else. Campaigners point out that the working conditions for the often undocumented migrant labourers from India's poorest states, can be highly dangerous and there are regular reports of injuries and fatalities. Earlier this month, six workers died when a fire broke out at one of the plots. Activists say the impoverished workers have no bargaining power.

Dwarika Nath Rath, a Gujarat-based activist and member of the Socialist Unity Centre of India, a small Communist party, has for many years been monitoring the human toll of the operations. "These workers, coming from places like Orissa and Bihar, say that if they want to save their families they have to die themselves," he said. "The main problem is that there is no regulation, there is no law. These people need to be given ID cards and registered as workers. When an accident happens these people are not in the log-book."

Ingrid Christiansen, a Delhi-based official with the International Labour Organisation, the UN body that oversees working conditions, said that there had been some advances in working conditions at the breakers' yards but that there was "room for improvement".

In May, an international convention meeting in Hong Kong agreed new rules that sought to regulate the worst of the industry's excesses, but campaigners say it has made little difference. Indeed, the convention rejected a proposal supported by over 100 human rights and environment protection organisations to phase out beaching operations – where ships are dumped at high tide and then drift to beaches to be taken apart. "Beach breaking would never be allowed in Europe," said Ingvild Jenssen, director of the Belgium-based campaign group Platform on Shipbreaking.

"When a vessel is broken without containment on a tidal beach there is bound to be pollution of the coastal zone. Experience with ship repair pollution in Europe and the US, and consequent rules for how these activities must be dealt with in contained environments, illustrates the problems."

The booming market on the Gujarat coast has brought back an old customer – to the consternation of campaigners. They claim that among the ships that will be hauled onto the beaches and pulled apart in the coming weeks are two US vessels, MV Pvt James Anderson and MV 1st Lt Alex Bonnyman. They will be the first such US ships scrapped in south Asia since 1998, when the Clinton administration – under pressure from campaigners – ordered a moratorium on the scrapping of US government-owned ships in south Asia.

"This is really shocking," said Jim Puckett, of the Basel Action Network, another campaign group.

"Now we have elected an environmental President, and his administration for the first time in 10 years is willing to ignore the law and dump toxic waste from US flagged ships on developing countries."