Ship-breakers sailing towards 10 per cent revenue growth: CRISIL

Joining Hong Kongconvention bolsters India’s global leadership.


The Indian ship-breaking industry is sailingtowards a 10 per cent revenue growth this fiscal on-year owing to improvedavailability of condemned vessels and higher rates for steel scrap.

A plunge in global trade due to the Covid-19pandemic weighed on sea freight, hurting viability of shippers and making morevessels available for dismantling at cheaper rates. Consequently, from thesecond quarter starting July 2020, there was a sharp rise in the number ofvessels bought for breaking, compared with muted activity in the first quarter.

The procurement price of ships condemned fordismantling was down by over $75 per tonne, averaging at about $320 per tonnefor the first six months in current fiscal when compared to correspondingperiod of previous fiscal, thereby making it lucrative for ship breakers.

Says Rahul Guha,Director, CRISIL Ratings Ltd., “Indian ship-breakers are set to procure between230 and 240 vessels, with a combined weight of over 1.9 million lightdisplacement tonnage (LDT) this fiscal, compared with 214 vessels weighing 1.77million LDT bought last fiscal. Meanwhile, steel scrap realisation has alsoimproved to `27,624 per tonne onaverage this fiscal compared with `26,558 per tonnelast fiscal. As a result, the industry’s revenue is likely to increase 10 percent year-on-year.”

Usually, the vessel procurement rate is about$20-$30 per tonne higher than the steel scrap selling rate, which indicatesship-breaking is a loss-making proposition. But, the key to profitability liesin the sale of higher-value non-ferrous metals, oil, and furniture found oncondemned ships, which form a sizeable part of the vessel scrap beyond steel.

A vessel typically comprises 30 per cent ofsuch non-ferrous products and 70 per cent steel. Sales of non-ferrous productsoffset the loss incurred in scrap steel sales and operating overheads.

The operating profitability of ship-breakerscould see 250 bps expansion year-on-year to about 5.0 per cent this fiscalbecause, for a large part of the year, scrap-steel rates have averaged $30 pertonne higher than vessel procurement rates, while foreign exchange rates haveremained steady (see chart 1).

Says Neha Sharma,Associate Director, CRISIL Ratings Ltd, “Steady demand for steel and continuedmomentum in vessels beaching for dismantling would drive industry revenue up10-15 per cent annually next fiscal. This will bolster the overall credit riskprofile of the ship-breakers over the medium term.”

India has enacted the Recycling of Ships Act,2019, and joined the Hong Kong International Convention (HKC), which sets thestandards for ship recycling. Of India’s 150 ship-breaking yards, 90 areHKC-certified, giving it an edge over its closest competitors, Pakistan andBangladesh, which have not yet acceded to the HKC. These three Asian neighboursdismantle more than three-fourths of the ships globally.

The government envisages doubling of India’sship recycling capacity by fiscal 2024 by targeting more scrap vessels from theEuropean Union leveraging HKC. That should help the domestic ship-breakingindustry, which is looking to widen the gap with neighbours and cement its poleposition (see chart 2).

The Union Budget for next fiscal announced areduction in duty on imported steel, which could lead to dumping from China andsofter scrap rates. Increasing trade volumes in post lockdown period has sentfreight rates soaring, thereby bringing back lucrativeness in sailing vessels. Asa result, the supply of vessels for dismantling has been restrained, in turnleading to firming up of procurement rates in the past three months. This couldlead to moderation of operating profitability next fiscal. Any sharp drop inscrap prices will bear watching.

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