23 September 2013

All Above Board | Rupee’s slide pinches Alang ship breakers

Assuming the rupee stays put at the current exchange rate, breakers in Alang will book a combined loss of Rs.300 crore

Ship breakers in Alang on the coast of Gujarat, home to the world’s biggest ship-breaking facility, have stopped buying ships for dismantling because of the steep fall in the value of the rupee since May this year.

Typically, breakers buy ships on a deferred letter of credit basis where the amount is paid to the foreign seller after 180 days. As the transactions are denominated in dollars, the fall in the value of the rupee has imposed additional liability on the ship breakers. This is because they are required to make the payment at the time of physical delivery of the ship purchased in April-May in dollars at the prevailing exchange rates, which means forking out more rupees for every dollar.

The rupee has fallen almost 14.67% against the dollar since the start of May.
The ship-breaking industry in Alang, where the annual turnover touches more than Rs.10,000 crore, is staring at a crisis.

Steel scrap from the demolished ships is a major source of raw material for India’s steel re-rolling mills. Normally, at least 70% of the total light displacement tonnage, or LDT, (weight of the ship excluding cargo, fuel, ballast, stores, passengers and crew) of a ship broken constitutes of re-rollable scrap. These are converted into bars and rods that are used in the construction sector.

Ship breaking in Alang has also spawned a unique bazaar with rows of shops under huge tents that sell everything from consumer to industrial goods procured from the vessels that are recycled there.

Alang has some 130 plots of varying sizes where ships that have completed their useful life are broken. Out of this some 100 plots are operational.

Currently, about 90-100 ships are being taken apart in Alang, all of which were purchased before the rupee started its downward spiral. That makes it one ship or less for a plot for breaking.

Normally, at any given point in time, about 130-140 ships are dismantled in Alang where ship breaking started in 1982.

Assuming the rupee stays put at the current exchange rate, breakers in Alang will book a combined loss of Rs.300 crore.

As the outlook for the rupee remains hazy, breakers are reluctant to strike new deals because of concerns on viability.

The industry, which employs some 40,000 people, has already started making adjustments to deal with the situation.

Some 30 yards have stopped operations. The 100 plots that are operational are working at minimum speed. Working hours have been reduced and weekend holidays have been extended.

In boom time, Alang ran a 12-hour schedule from 7am to 7pm. The cutting time has been reduced to nine hours between 8am and 5pm with an hour’s break for lunch in between.

These days, workers don’t dismantle ships on Saturdays— earlier they had a weekly off only on Sundays.

While banks have turned cautious in lending money, private lending (there is large scale private lending in Alang through informal channels) has stopped altogether.

Alang is also facing another issue. The Gujarat government has not finalized a policy for leasing of plots to ship breakers to renew the earlier policy that ended in September 2009 after a five year run.

Since then, pending the new policy, the plot leases are being renewed every 3-6 months. In the meanwhile, the Gujarat government has taken a blanket undertaking from the ship breakers on a Rs.100 stamp paper that whatever policy will be finalized would be acceptable to them.

Plot leases have three components—a development charge, a breaking charge and rent for the land. Gujarat currently collects a development charge of Rs.200 per square metre per year, while the rent for the land has been set at Rs.60 per square metre per year. The breaking charge is Rs.100 per LDT of the ship.

The development charge collected from ship breakers are to be used for improving the infrastructure in Alang.

Using the rupee crisis as a bargaining point, ship breakers have asked the government to refrain from hiking the development charge in the new policy being finalized for leasing of plots.

They have also sought the introduction of a transfer clause in the new policy that allows an existing lease holder to sell his rights to a third party with the approval of the government.

India, Bangladesh, Pakistan and China carry out 80% of the world’s ship-breaking business.

Dismantling activities in Alang boomed from 2009 as a slowdown in global trade and lower freight rates forced global fleet owners to retire their aging ships at a faster pace. In the last four years beginning 2009-10, Alang dismantled 348, 357, 415, and 394 ships, respectively.

Since April this year, 134 ships have been dismantled. But, new transactions have come to a grinding halt in Alang due to the volatility in the rupee.

For the moment, ship breakers are pinning their hopes on the new governor of the Reserve Bank of India, Raghuram Rajan, to tide over the difficult days.

Source: live mint. 19 September 2013

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