Rise of the Chinese Scrap Dragon
Saturday, 04 August 2012 | 00:00
Given the weakness in most of the major freight markets, newbuilding contracts are much harder to come by than they were a few years back. In this circumstance, it is perhaps unsurprising that shipyards in China have begun to consider adding other strings to their bow. These include ship repair and ship demolition. The latter in particular will clearly be a growth market in the coming years. China has an advantage in that its quayside methods of demolition do not attract the same controversy as the beaching methods used in the Indian Subcontinent. In consequence, Chinese demolition volumes have been expanding recently, and recent events in India may open the door to further scrapping in China.
Total global demolition soared in 2011, when 40.4m dwt of vessels were sold for scrap. 28.3m dwt of vessels were scrapped in 1H 2012, already in excess of the total volume in full-year 2010. In GT terms, bulkers over 25 years old account for 9.0% of the fleet, suggesting there is plenty of potential for further scrapping. Whilst the figure for tankers is lower (3.1%), freight markets have been sufficiently poor that some owners have begun to scrap vessels under 20 years of age. Demolition over 2012 as a whole is currently projected to total 55.1m dwt.
Traditionally, favourable pricing has dictated that the majority of tonnage has headed to beaches in the Subcontinent. In 2011, Bangladesh, India and Pakistan accounted for 67% of global demolition. However, the Chinese market share has risen from 7.7% in 2005 to 21% in 1H 2012.
The variable spread of pricing is shown as lines on the graph. This demonstrates that, historically, the breakers of the Indian Subcontinent have tended to be able to offer a premium on what Chinese scrap yards can pay. At the time of the formation of the Bangladeshi breakers’ cartel in 2007, this spread was as large as $410/ldt. During this period, China’s market share was less than 10%. The differences in price have been much narrower since 2009, as vessel supply has expanded. China’s market share has grown gradually, as new entrants build a foothold in the market, and as yards have been able to take tonnage positioned in the Far East.
More recently, Subcontinental scrap prices have slid by $100/t over 1H 2012 and the premium over the Far Eastern prices has closed to almost nothing. This situation has resulted from a decline in Indian steel product prices, combined with a sharp depreciation in the Indian rupee over the last year (of 24% compared to the US dollar). Chinese yards have consequently become more competitive.
In recent weeks, the situation has been clouded further by a court ruling in India which threatens to ban the entry of any ships not complying with the provisions of the Basel Convention on the international movement of hazardous waste. This could affect many vessels. So far, is seems that the effect is less severe than feared, and vessels are still entering the country. However, the situation is fluid and if Indian activity was halted, China, with a self-professed, government-backed policy of promoting green recycling, could stand to benefit and increase its market share further going forward.