30 November 2011

Slump in freight market leads to surge in shipbreaking

Ship owners are a worried lot today as a depressed freight market has been taking a toll on their earnings for the last almost two years now. But players at the other end of the business - shipbreaking - are increasingly cashing in on the shipping industry downturn.

Generally, bouts of frail freight market make it expensive for shipping companies to deploy older vessels, prompting them to turn the ships over to the scrap yard.

And this makes it a boom time for shipbreakers, especially when prices of steel scrap spiral, as it is happening at present.

“Increasing global shipping capacities against a backdrop of weakening in economy will lead to a surge in shipbreaking 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 neighbouring markets,” a report by CRISIL says.

In 2009 and 2010, the volumes of global shipbreaking aggregated about 44 million gross tonnage (GT), which is almost twice the volumes of the four proceeding years.

Mr Gurpreet Chhatwal, Director of Crisil Ratings, points out that new ships ordered in 2006-08 will be ready for delivery by 2012 and result in expansion of global capacities by over 25 per cent. “However, global trade is expected to slow down, driving reduction in freight rates in next two years. And this will improve economics of increased scrapping of older ships,” he said.

Crisil estimates that of the 180 million GT of global shipping capacities over 20 years old, about 55 million GT will come to the breaking yards in the next two years.

The global market share of India's shipbreaking industry, located at Alang in Gujarat, is expected to grow to 40-45 per cent in the next two years, from 35 per cent in 2010.

Legal restrictions on shipbreaking in Bangladesh and China's higher shipbreaking costs are expected to help Indian players.

In the last three years, the revenues of 52 Crisil-rated shipbreakers, which account for about 46 per cent of the Indian shipbreaking industry, increased at a compound annual growth rate of 46 per cent, helping these players nearly double their net worth.

Source: Hindu Business Line. By Amit Mitra (amitmitra@thehindu.co.in). 29 November 2011

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