24 September 2015

China's shipbreakers take a hammering:

Falling steel price and lower cost South Asia rivals make many businesses unsustainable

IT WAS quiet at the Seventh Ship Recycling & SNP Summit held in Shanghai last week. Participants, less than half the expected number, milled about in subdued, even downcast, manner. Elaborate placement of scattered seats in the large hall made the conference look even more underattended.

“This year’s meeting is particularly sluggish,” admits a staff member from organiser Enmore Group.
So is the shipbreaking market in China.

The business, which thrived on China’s fast growth after the earlier 1980s’ opening-up reform, has now gradually turned into a dying industry — facing depressed steel prices and overwhelming challenges from the Indian subcontinent.

The number of active players has diminished significantly: from about 30 between 2009 and 2010 during when the market was puffed up by Beijing’s Yuan4trn ($628.4bn) stimulus package, to fewer than 10 now, according to shipbroker Far East Horizon Shipping Consulting.

The survivors are hardly better off, vexed by a trail of red ink. Qian Haiping, general manager of Jingjiang Xinmin Shipbreaking based in southeast China, says not only has his company yet to make any profit since the domestic steel market began to collapse in 2012, but also it has lost almost all cash reserves from earnings banked in the earlier good days. “We are very pessimistic,” he says.

With the fall in steel price outpacing the cost of demolishing the retired vessels, each ship dismantled adds to a loss to the yards, said China National Shipbreaking Association in its 2015 interim report. The industry’s total losses during the period have exceeded Yuan300m ($47.1m).

Lower revenue, higher cost
Cheap as cabbage — that’s how traders mock the value of Chinese steel. The average price for local steel scrap has declined by almost two-thirds from its peak four years ago to around Yuan1,200 ($188) per tonne in August, according to data from industry consultancy Mysteel.

A quick recovery is unlikely, however. Analysts suggest that the country’s slowing economy will continue to weigh on steel consumption, and trimming excess capacity can take time due to employment concerns.

While revenues have shrunk, costs are climbing. Workers at major Chinese ship-recycling yards are making about Yuan4,000 a month — twice the wage in India. Yet in China, few young people are interested in the job, says Liu Yanhui, deputy general manager of Jiangmen Zhongxin Shipbreaking & Steel Co, another major Chinese shipbreaker based in Guangdong province.

Meanwhile, tightening government rules in environmental protection have also translated into higher costs, including  required facility investment and added interest on loans as a result of a longer scrapping process.

“But India, Bangladesh and other south Asian countries still use the traditional beaching, [which directly puts China’s ship-recycling industry at a competitive disadvantage]."

As a result, the price today that Chinese shipbreakers can at best offer for old tonnage is only half the rate offered by their Indian peers. Prices for a handysize bulker, for example, stood at around $150 per ldt in China, while the India yards could bid more than $320, brokers said.

“With that price spread, we won’t be able to acquire any ships from abroad,” Mr Qian says.

Government subsidies
However, there are still vessels available, supported by the scrap-and-build subsidy that Beijing launched last year and later granted a two-year extension till end-2017.

The incentive scheme, although providing no direct handouts to shipbreakers, stipulates that all Chinese shipowners that seek the handouts must dispose of their vessels at compatriot yards. 

As of end-July, 95 out of the 100 vessels dismantled in the country this year are Beijing’s subsidised tonnages, according to FEHSC.

However, the Chinese shipbreakers stand to lose this life preserver should there be no further extension of the subsidy in about two years’ time.

“They could face a dead end where there is no vessel to scrap,” said Ji Miao, FEHSC’s senior manager, who previously served as operation director at Taizhou Weiye Shipbreaking.

Mr Qian says his yard is deeply concerned about the future and might be forced to change business.

Hopes for green recycling
The predicament has made some yards pin hope on the ship-recycling regulation of the European Union, which offers Chinese players operating at a higher technical standard than their Indian and Bangladeshi colleagues a chance to gain an edge in green recycling.

According to the regulation, ship-recycling facilities will have to be included in the “EU List” — naming those yards that comply with a string of environmental requirements — in order to recycle EU-flagged ships from December 31, 2018 at the latest. Mr Liu says his yard, Zhongxin, gained the certificate from ClassNK in 2012 to carry out environmental ship recycling based on the Hong Kong Convention, having invested hugely in improving yard facilities. That includes construction of an asbestos second treatment centre and a 5,000-tonne floating dock that obviates the need to beach ships.

Now the company is working with the Japanese institution again on a recycling model that aims to meet the EU requirements.

“I think the green recycling has a future,” he says, “But before that, we need more government support, especially tax rebates, in order to survive.”

China imposed a 17% VAT and 3% tariff on every old ship imported, and the yards demand a reduction of such taxes in compensation for the extra spending on conducting green scrapping, partly also requested by the government. 

But the likelihood of Beijing budging seems low, as the role of the shipbreaking industry played in China’s economy has largely weakened today.

Steel scrap produced by the industry accounts for merely 0.2% of the country’s total output, data from CNSA and China Iron and Steel Association shows.

Zhongxin has dismantled about 150,000 ldt of retired vessels in the first half of this year, a good result in tonnage terms. But Mr Liu says the yard has decided to largely reduce the volume in the second half.
“We need to narrow the losses as the market seems to get bleaker,” says Mr Liu.

Source: lloyds list. 22 September 2015