30 November 2011

Shipbreakers cash in on shipping industry downturn: CRISIL

CRISIL Ratings has come out with its report on shipping industry. According to the rating agency the global market share of India’s shipbreakers is expected to grow to 40-45% in the next 2 years from 35% in 2010.

Ban on iron-ore mining to benefit Indian players

CRISIL believes that increasing global shipping capacities against a backdrop of weakening in economy will lead to a surge in ship breaking activity in the next couple of years. India’s shipbreakers will acquire a larger market share globally, supported by favourable demand for steel scrap, and limited competition from other markets, including China and Bangladesh.

Trends for India’s shipbreaking industry, situated at Alang, are counter-cyclical to those for the global shipping industry. Bouts of weak global freight rates make it expensive for ship owners to operate old ships—this generates a surge in shipbreaking activity. Depressed global freight rates since 2009, and high prices for steel scrap have resulted in a spurt in shipbreaking. In 2009 and 2010, the volumes in global ship breaking aggregated around 44 million gross tonnage (GT)—twice the volumes of the 4 preceding years.

Expansion in global shipping capacities (with the arrival of new ships), and declining freight rates will continue to propel interest in shipbreaking. Says Gurpreet Chhatwal, Director, CRISIL Ratings, “New ships ordered in 2006-08 will be ready for delivery by 2012, and result in expansion in global capacities by more than 25 per cent. However, global trade is expected to slow down, driving reduction in freight rates in the next 2 years. These factors will together improve the economics for increased scrapping of older ships.” CRISIL estimates that of the 180 million GT of global shipping capacities that are more than 20 years old, around 55 million GT will be available for breaking in the next 24 months.

The global market share of India’s shipbreakers is expected to grow to 40-45% in the next 2 years from 35% in 2010. Uncertainty regarding legal restrictions on shipbreaking in Bangladesh, and China’s higher shipbreaking costs will help India’s players bid more competitively on ship purchases. Shipbreakers will also benefit from favourable demand economics in India for steel scrap extracted from shipbreaking. 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 shipbreaking industry meets 30% of India’s requirement for steel scrap.

In the last 3 years, the revenues of 52 CRISIL-rated shipbreakers (constituting 46% of the shipbreaking industry in India) increased at a compound annual growth rate of 46%, helping these players nearly double their net worth. Adds Manish Gupta, Head, CRISIL Ratings, “Efficiencies of scale and strong growth opportunities will strengthen the business risk profiles of India’s shipbreakers. 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. 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.”

Source: Money Control. 29 November 2011

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