India: Outlook for domestic ship-breaking industry turns negative with volatile scrap prices and falling rupee: ICRA
Globally, the ship-breaking industry has been concentrated mainly in top ﬁve countries — India, Pakistan, Bangladesh, China, and Turkey. These countries have regularly shared 97–98% of the end-of-life tonnage for the last 15–20 years. At present, the South Asian yards (comprising India, Pakistan and Bangladesh) have emerged as the hub (~80% of the global ship-breaking output) aided by the natural geographical advantage, cheap manpower cost and less stringent regulations. During CY2016 to CY2018, while India scrapped the highest number of ships, Bangladesh fared better in terms of gross tonnage (GT), indicating it as the preferred destination for large vessels. However, Bangladesh overtook India’s position in CY2019 and broke the highest number of ships as well as tonnage due to high demand from its secondary steel manufacturers, leading to favourable scrap prices.
The availability of ships for recycling is inversely correlated to the freight rate of shipping vessels, which in turn is a function of the global demand for seaborne transport and supply of new vessels. A major portion of a ship breaker’s revenue comes from the sale of ferrous or mild steel (MS) scrap, the prices of which continue to remain subdued in the domestic market. The total tonnage demolished by India fell by 37% in CY2019 to ~14 lakh LDT against ~22 lakh LDT in CY2018. Further, stressing on the demand-supply dynamics, Mr. Suprio Banerjee, Vice President and Head, Mid-Corporate ratings, ICRA, said: “The ship-breaking activity remained tepid in India during CY2019 due to subdued demand and depressed scrap prices. While it gathered momentum at the start of CY2020 following the implementation of the International Maritime Organisation (IMO) regulations from January 2020, weakness in the international shipping markets further aggravated by the coronavirus, has dampened sentiments. The outbreak of coronavirus has not only exacerbated the freight market but has also placed restrictions on vessels coming in and out of virus hit nations, as well as the trade routes; and deliveries in the region, thus adding to ship owners and buyers’ woes. The outlook for the sector has accordingly turned negative. Any meaningful recovery of scrap prices in the domestic market and stable foreign exchange rates thus remain important, given that the freight markets are expected to continue to suffer leading to steady flow of tonnage for recycling in the near term.”
The Government of India ratified the Hong Kong Convention (HKC) in November 2019 and the Ship Recycling Act was enacted in India to give effect to the provisions of the HKC in December 2019. The implementation of this Act will streamline existing ship-recycling norms and help in the restriction/proper treatment of hazardous materials on board and the waste produced, post recycling. It will raise the profile of the Indian ship-recycling industry as being environment-friendly, and safety conscious and will go a long way in establishing India’s position as the market leader.
Regarding the financials, the operating profit margin for the Indian ship breakers has remained low (average 1-2%) during the past few years because of the low value addition, stiff competition from the domestic as well as the competing countries’ players and volatile scrap prices. The margin is also vulnerable to foreign exchange rate fluctuations as purchase transactions are denominated in the USD. Purchase of ships is generally backed by a Letter of Credit (LC) in India. Tightening of banking norms for issuance of LCs to purchase ships, is further adding up to the challenges faced by the Indian ship recyclers. Reflecting on the same Mr. Mayank Agrawal, Assistant Vice President, ICRA, added “The industry players are facing turbulent times currently with volatile scrap/steel plates prices, unfavourable foreign exchange rates and restriction on beaching of vessels, which will lead to increase in the procurement cost. This coupled with unsettling sales/scrap prices, the margins for ship breakers are expected to remain under pressure in the near term. However, enactment of the Ship Recycling Act, has proved to be a silver lining. In the near to medium term, the compliance and capex cost for recyclers to comply with the HKC may increase, but the same is expected to be neutralised by higher volumes and competitive procurement costs in the long term.”