NE BUSINESS BUREAU
MUMBAI, MAR 15
The domestic ship-breaking industry’s revenue is expected to see a 10 percent year-on-year increase this fiscal due to improved availability of condemned vessels and higher rates for steel scrap, rating agency Crisil said on Monday.
Further, with India enacting the Recycling of Ships Act, 2019, and joining the Hong Kong International Convention (HKC), which sets the standards for ship recycling, the move has bolstered the country’s leadership position globally, it said.
According to the report, a plunge in global trade due to the COVID-19 pandemic weighed on sea freight, hurting the viability of shippers and making more vessels available for dismantling at cheaper rates.
Consequently, from the second quarter starting July 2020, there was a sharp rise in the number of vessels bought for breaking, compared with muted activity in the first quarter.
Usually, the vessel procurement rate is about US $20-30 per tonne higher than the steel scrap selling rate, which indicates ship-breaking is a loss-making proposition. But the key to profitability lies in the sale of higher-value non-ferrous metals, oil, and furniture found on condemned ships, which form a sizeable part of the vessel scrap beyond steel, as per Crisil.
A vessel typically comprises 30 percent of such non-ferrous products and 70 percent steel. Sales of non-ferrous products offset the loss incurred in scrap steel sales and operating overheads, it said.
The procurement price of ships condemned for dismantling was down by over US $75 per tonne, averaging at about USD 320 per tonne for the first six months in the current fiscal, when compared to the corresponding period of the previous fiscal, thereby making it lucrative for ship breakers, it said.
“Indian ship-breakers are set to procure between 230 and 240 vessels, with a combined weight of over 1.9 million light displacement tonnage (LDT) this fiscal, compared with 214 vessels weighing 1.77 million LDT bought last fiscal.
“Meanwhile, steel scrap realisation has also improved to Rs 27,624 per tonne on average this fiscal compared with Rs 26,558 per tonne last fiscal. As a result, the industry’s revenue is likely to increase 10 percent on-year,” Rahul Guha, Director, Crisil Ratings.
According to Crisil, the government envisages doubling India”s ship recycling capacity by fiscal 2024 by targeting more scrap vessels from the European Union leveraging HKC.
That should help the domestic ship-breaking industry, which is looking to widen the gap with neighbours and cement its pole position, it said.
Of India’s 150 ship-breaking yards, 90 are HKC-certified, giving it an edge over its closest competitors, Pakistan and Bangladesh, which have not yet acceded to the HKC. These three Asian neighbours dismantle more than three-fourths of the ships globally, Crisil said.
“While steady demand for steel and continued momentum in vessels beaching for dismantling would drive industry revenue up 10-15 percent annually next fiscal. This will bolster the overall credit risk profile of the ship-breakers over the medium-term,” said Neha Sharma, Associate Director, Crisil Ratings.
Meanwhile, the Union Budget for the next fiscal announced a reduction in duty on imported steel, which could lead to dumping from China and softer scrap rates. Increasing trade volumes in the post lockdown period has sent freight rates soaring, thereby bringing back lucrativeness in sailing vessels, said the release.
As a result, the supply of vessels for dismantling has been restrained in turn leading to firming up of procurement rates in the past three months. This could lead to moderation of operating profitability next fiscal, it added.
