13 December 2013

Chinese subsidies to shake up shipbreaking market:

The Chinese government has announced a long-awaited scrapping subsidy plan that aims to boost the country’s ailing shipbuilding and shipping industries.

The plan, drafted by four ministerial level departments, applies only to China-flagged tonnage that is demolished at domestic yards in North and South China. Foreign flagged vessels and owners are exempt from the policy.

The key highlights of the subsidies include a premium of RMB750 per gt ($124 per gt) to be provided to shipowners and applied to any Chinese flagged vessels that are recycled locally. The same level of subsidy to be applied on any newbuilding (from domestic owners to be Chinese flagged) that is built in China.

This subsidy is only applicable if the shipowner has scrapped a similar sized vessel over the same time period at a domestic recycling yard. The scheme will include vessels delivered to Chinese yards during fiscal 2013, and will last through fiscal 2015.

The subsidies have their share of limitations. One shortcoming is that the procedure for Chinese owners and Chinese flagged vessels seeking to make full use of the subsidies is expensive and complicated.

Domestic companies are first required to obtain the necessary approvals or licenses from the Chinese Communications Ministry. Thereafter, they are required to set up an operating company in mainland China, and are required to pay a tax rate of 25% on the transaction.

There is an age limitation for vessels to be Chinese flagged, viz. 18 years for containers and 20 years for bulk carriers.

The immediate beneficiary of the above subsidies appeared to be the major state-run Chinese companies, which had committed some 40 vessels to Chinese yards during 2013. Additionally, at least one VLCC from Chinese owners has been reported sold to a local yard.

At the time of filing this report, only five yards in North and South China had made the cut. However, several more (from North China) are expected to obtain the necessary approvals in the near future.

If Chinese owners and yards can sift through all these complicated rules and lay their hands on the subsidies, it could mean that fewer Chinese-flagged vessels would be making their final journey towards the Indian sub-continent.

Even before the Chinese government announcement of subsidies for shipbreaking, the recycling industry in India had turned cautious, with both steel prices and currency fluctuating. This had led to a majority of end buyers choosing not to make any offers at all, and has resulted in nearly half of junk shipyards in Alang being empty.

There were far fewer bulkers, tankers, reefers (due to the high season) or even MPP / tweens / general cargo units for sale due to improving freight rates. Container rates, though, remain poor and certain sizes and types (coupled with the new eco designs) are swiftly making vast swathes of this sector virtually redundant.

There have been no recent market sales in India, Pakistan and China, though a greater number of container vessels have unsurprisingly become available for sale.

 “It is now increasingly becoming the task of the cash buyer to find the hot end buyer in Alang for any given tonnage, and work with him to conclusion, rather than risk speculating and losing out heavily,” said US-based cash buyer GMS.

Meanwhile, elections have been announced in Bangladesh for 5 January 2014, as a result of which, a select group of end buyers has been gambling on the fact that the continued political instability, strikes and blockades could contribute to a rise in steel prices, and are stockpiling their yards accordingly.

Source: sea trade global. 13 December 2013

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