29 July 2012

Cash buyers defend their role in ship demolition:

Biggest players say they are merely middlemen and do not make huge amounts of money

CASH buyers acting as the intermediary between owners and ship recyclers are trying to dispel the myth that they are making huge amounts of money out of selling end-of-life vessels for demolition.

They say they face the same squeeze on finance availability as everyone else in the shipping industry.

At Informa’s annual Ship Recycling conference in London, GMS commercial director Zia Ansari said cash buyers were “not making huge fantastic money” and that the margins were slim.

His comments followed Sea2Cradle managing director Tom Peter Blankestijn asking a cash buyer panel if they could help the push for improved standards at shipbreaking facilities by putting $2 aside for every lightweight tonne they sell that could then be invested into yards.

His argument was that money could easily be built up if, for example on every very large crude carrier sold, cash buyers could put aside $70,000 based on an average 35,000 ldt.

However, Mr Blankestijn, who used to run AP Moller-Maersk’s recycling business and is experienced in the Chinese demolition business, was challenged by Mideast Shipping & Trading general manager Steve Wansell, who asked: “How much exactly do you think cash buyers make on a deal?”

The ex-banker-cum-cash buyer batted back misconceptions that they make a $1mor so on deals, and said on average “it is more like $5 or $6 per ldt”.

GMS trader Jamie Dalzell added that sometimes it could be as low as $1 per ldt or even breakeven, and so it was not possible for cash buyers to build up significant investment funds that alone could change the industry.

The panel pointed to the extreme volatility of demolition rates so far this year as proof that it was difficult to make money at the moment.

A surge in scrapping candidates earlier this year and a combination of financial issues, as well as the onset of the monsoon season, have seen breaker appetite dry up and prices fall $100 per ldt in the last month.

Considering that once cash buyers have purchased a ship from an end owner they then have to re-sell it to a breaking yard, the dramatic drop in prices has seen renegotiations become the norm and some cash buyers have lost money on deals.

All this is happening at a time when there is an increasing volume of ships being marketed for sale for demolition as owners dispose of uneconomic vessels, but there is a limited pool of large cash buyers.

Mr Wansell said that of the 20 cash buyers operating these days, only five or six were large scale, properly structured businesses such as Mideast, GMS and Wirana.

Clarksons’ Darren Lepper asked whether buyers felt the pressure of having to put up large deposits during this busy period, as without cash buyers there would be no recycling.

Mr Dalzell said that GMS was trying to focus its business on vessels purchased on a delivered basis as opposed to as is, because it tied up less cash and meant the company was not blocked from buying more vessels.

Buying a ship on a delivered basis involves the cash buyer paying a 10%-30%deposit to the owner, but the latter then sails the vessel to the shipbreaking destination, where the rest of the money is paid.

By comparison, when a ship is bought on an as is basis, the cash buyer takes ownership of the vessel at a given location—perhaps waters off Singapore or the UAE—and pays the owner 100%. The cash buyer then has to reflag, insure and crew the ship on its last voyage.

“The business model is changing all the time, ”Mr Wansell said, referencing the many moving parts of the business.

Mideast was doing deals with shorter laycans, meaning the period between a sale being committed and the ship being delivered is smaller than in the past, to reduce risk.

“This is not fun and games. The margins are very small in this business and it has become very much about volume.”

Source: By LIZ MCCARTHY. 21 June 2012

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