Ship-breakers sailing towards 10% revenue growth

Mumbai, March 15 : The Indian ship-breaking industry is sailing towards a 10 per cent revenue growth this fiscal on-year owing to improved availability of condemned vessels and higher rates for steel scrap, Crisil said on Monday.

According to a report by the ratings agency, a plunge in global trade due to the Covid-19 pandemic weighed on sea freight, hurting 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.

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

MS Education Academy

Rahul Guha, Director, CRISIL Ratings Ltd, 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 per cent on-year.”

Usually, the vessel procurement rate is about $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.

A vessel typically comprises 30% of such non-ferrous products and 70% steel. Sales of non-ferrous products offset the loss incurred in scrap steel sales and operating overheads.

The operating profitability of ship-breakers could see 250 bps expansion on-year to about 5% this fiscal because, for a large part of the year, scrap-steel rates have averaged $30 per tonne higher than vessel procurement rates, while foreign exchange rates have remained steady, the report said.

Neha Sharma, Associate Director, CRISIL Ratings Ltd, said: “An improvement in operating profitability would shore up the industry’s interest coverage to about 3.5 times this fiscal from 2.4 times last fiscal, supporting the credit profiles of CRISIL-rated ship-breakers. While steady demand for steel and continued momentum in vessels beaching for dismantling would drive industry revenue up 10-15 per cent annually next fiscal. This will bolster the overall credit risk profile 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 the standards for ship recycling. 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.

The government envisages doubling of 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.

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 post lockdown period, has sent freight rates soaring, thereby bringing back lucrativeness in sailing vessels. 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. Any sharp drop in scrap prices will bear watching.

Disclaimer: This story is auto-generated from IANS service.

Subscribe us on The Siasat Daily - Google News
Back to top button