12 March 2012

Prices buoyed by steel demand:

The glut is not hitting prices with levels much the same as last year.

Steel-plate prices are the reason ships are still selling for demolition at up to $500 per ldt.

“That is the driving force,” said one broker. “There are still some remarkably high prices being paid.”

The price of steel may have fallen since the first half of 2011 but in India, the biggest ship-recycling nation, scrap is still fetching in excess of $500 per tonne.

Recycling, says the broker, is now a commodity market and “as it stands, I don’t see any logical reason why prices should not remain where they are for the foreseeable future”.

The fact that a feast of ships is available for demolition does not automatically depress prices, as events in the past year have demonstrated.

The current figure of close to $500 per ldt for tankers in the Indian subcontinent and around $465 per ltd for dry-cargo vessels reflect the averages also seen during 2011.

India has been helped recently by an improvement not only in steel prices but also by a strengthening of the rupee against the US dollar after a 14% fall since early 2011.

In addition, cash buyers and end-users have had one eye on the need to acquire vessels before the latest budget kicked in, with some, however, reportedly paying over the odds in the process.

Even so, several ships have recently remained on the market unsold. Obviously, some cash buyers have kept their powder dry, while Global Marketing Systems (GMS) says the market is “groaning and cracking” under the weight of available tonnage.

Certainly, prices offered by Bangladesh have been noticeably lower since it tentatively reopened to imports.

Evidence persists that buyers remain unnerved. At the time of going to press, the Bangladesh High Court still had to rubberstamp new government regulations to raise safety and environmental standards and formally declare that a ban on ship imports had been lifted.

Until recently, half the approximately 70 active plots in Chittagong were idled by the ban, with thousands of labourers laid off.

“I am surprised that so many people are considering taking ships for Bangladesh delivery because it is still uncertain what is happening,” one broker told TradeWinds. “I haven’t seen any documents from the court which states that they [recyclers] can carry on.”

Bangladesh end-receivers have also been struggling to get the necessary finance from banks and even when they are able to open letters of credit (LCs) it has then taken up to seven days for customs and other authorities to approve vessels and for deals to close.

“Chittagong is now a far more challenging market...,” commented in a recent market report.

A shortage of dollars in Bangladesh has also meant banks there asking for substantial collateral, according to broking sources.

The earlier currency collapse in India also led to risk-averse banks requesting breakers to hedge against foreign-exchange fluctuations by booking greenbacks for up to 50% of the Indian rupee value of Lcs.

Cash buyers have been caught out by the stop-start situation in Bangladesh, more often affecting the higher-risk-taking big players.

Similarly, end-receivers are vulnerable to demolition price falls and are not averse to seeking to renegotiate deals, although surprisingly few get as far as the courts.

Downstream the system should pose fewer risks as recyclers typically make a contract with a mill for maybe 10,000 tonnes of steel at a fixed price.

If the price of steel plate subsequently rises, the breaker does not benefit but neither does he lose out if it falls.

Meanwhile, some cash buyers have been looking to buy ships for forward delivery at a lower price, for example in May or June prior to the monsoon season.

Broking sources say a $20 to $30-per-ldt reduction is reasonable given the gamble being taken but the best owners are likely to agree to is $10 to $20 per ldt below current levels.

There is also a push in the paper market to promote scrap-steel derivatives.

London-based Freight Investor Services (FIS) did the first swap trade last year at a price of $422 per metric tonne for 1,000 metric tonnes between Cargill International and another Londonbased physical trader. Settlement was against The Steel Index’s Turkish CFR Scrap Steel Index and cleared by LCH.Clearnet.

As well as an opportunity for owners to lock in a scrap price for their ships, swaps are also seen by some as a potentially useful instrument for recyclers, who buy the underlying physical assets —the steel in the ships — but must wait months before dismantling and selling the scrap.

Source: TradeWinds Business Report. By Geoff Garfield. 9 March 2012

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