Factors promoting ship breaking
Global freight rates have been depressed and equally volatile ever since 2009, and high prices for steel scrap have resulted in a spurt in ship breaking, the report said. In 2009 and 2010, the volumes in global ship breaking aggregated to around 44 million gross tonnage (GT) which is twice the volume in the preceding 4 years, CRISIL said.
According to the report, new ships that were ordered during 2006-08 would be ready for delivery by 2012, expanding global capacities by more than 25%. The expansion in global shipping capacities coupled with the declining freight rates will continue to propel interest in ship breaking, said CRISIL. The global market share of India’s ship breakers was expected to grow to 40-45% in the next 2 years from 35% in 2010, based on the demand for steel scrap and also limited competition from other markets including China and Bangladesh, the report said.
Gurpreet Chhatwal, director of CRISIL Ratings said in a press statement that global trade is expected to slow down, driving reduction in freight rates in the next 2 years and these factors will together improve the economics for increased scrapping of older ships.
Shortage in supply of iron ore, following ban on iron ore mining in Karnataka, and possibly other states, will keep demand for scrap buoyant in India in the next 2 years. The ship breaking industry meets 30% of India’s requirement for steel scrap, the report said. CRISIL estimated that of the 180 million GT of global shipping capacities that are more than 20 years old, approximately 55 million GT would be available for breaking over the phase of the next 24 months.
The uncertainty over legal restrictions on ship breaking in Bangladesh as well as China’s higher ship breaking costs will help India’s players bid more competitively on ship purchases. Ship breakers will also benefit from favourable demand economics in India for steel scrap extracted from ship breaking. In the last 3 years, the revenues of 52 CRISIL-rated ship breakers (constituting 46% of the ship breaking industry in India) increased at a CAGR of 46%, helping these players nearly double their net worth.
Manish Gupta, head at CRISIL Ratings said in a media statement that the efficiencies of scale and strong growth opportunities will strengthen the business risk profiles of India’s ship breakers. However, the sector will remain vulnerable to key risks such as environmental concerns, economic cycles, sharp movements in scrap steel prices, and fluctuations in forex rates, said Mr Gupta.
Mr Gupta signed off by saying that players who scale up operations steadily, while simultaneously adopting a disciplined financial policy and hedging foreign exchange exposures, stand a better chance than other players of having their ratings upgraded.
Priyanka Roy Chowdhury |
Rapidly increasing global shipping capacities against the backdrop of a gradually dwindling economy would lead to a surge in ship breaking in the next couple of years, said a report by ratings, research and risk and policy advisory services firm CRISIL. Global trade is expected to slow down, thereby impacting the global freight rates. Weak global freight rates would render it expensive for ship owners to operate old ships.
