04 October 2012

Shipbreakers to gain from lull in global shipping:

The domestic shipbreaking industry is expected to benefit from the lull in global shipping activity caused by excess supply, says a report by the ratings agency Icra.

“The domestic shipbreaking yards should remain busy in the medium term as the global shipping market fundamentals are unlikely to materially improve,” the agency said.

The report attributes the optimism to the heavy orders placed in the period leading to 2008 global credit crisis and the resultant slowdown in charters once the global recession began, which led to more ships being available for dismantling annually than in the past 20 years.

According to an estimate, the country’s shipyards dismantled 400 ships last fiscal, Icra said, without giving any outlook for the same.

Icra, which has 25 shipbreakers under rating, said the combined revenues of these companies more than doubled to Rs 900 crore in FY11 from Rs 400 crore in FY09.

However, it also warned about the rising competition from China threatening the dominance of domestic shipbreaking yards, concentrated in Alang and Sosiya in Gujarat and Maharashtra and Bengal. Ship-breaking yards in China and some other Southeast countries of late have been increasingly gaining a foothold in the industry.

Till now, the domestic shipbreaking industry, which grew manifold after the 1991 liberalisation, has benefited from favourable geographic conditions like wind and tidal movements.

Additionally, any further rupee depreciation which has been witnessing high volatility since the past one year or so, sliding steel prices and increase in interest costs, will be some of the key risks for the segment, it said.

In the long term, the over capacity in domestic steel production, which may pull down steel prices, is also a risk for the segment, the agency report said.

The regulatory risks for the segment, which has for long been a target of multiple judicial, governmental and non-governmental agencies for pollution and employees’ health-related issues, continue to be a detrimental factor, it said.

“The Supreme Court recently passed an order requiring stricter implementation of ship-breaking norms in view of the environmental and health hazards. This as well as any other proposed regulation could entail events-based risks for the players and may affect their competitiveness,” Icra senior vice-president and corporate ratings co-head K Ravichandran, said in the note.

Source: Business Line. 30 September 2012

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