Shipbreaking sector buffeted by currency, regulatory headwinds:

The shipbreaking industry is facing pressure from currency fluctuations, slowdown in the steel sector and regulatory risks. This, despite a buoyant outlook on vessel availability.

The global shipping downturn and weak macroeconomic headwinds since 2009 have facilitated the growth of the ship breaking industry with an increase in the supply of ships to be scrapped.

The Alang shipbreaking yard, India’s biggest yard, dismantled 415 ships during 2011-12. Ever since its inception in 1982, Alang has emerged as the choicest ship-scrapping destinations for ship owners around the world. There are 173 plots to carry out ship-recyclingactivities. This is an industry by itself, as it provides around 30,000 jobs in Alang and generates steel totalling millions of tonnes every year, according to the Gujarat Maritime Board.

India, with its favourable weather conditions and low manpower costs, has emerged as a leader in terms of both volume and number of ships broken. Further, the relatively less stringent regulations related to environment and human health hazards have also aided the growth of the ship breaking business in India.

STEADY SUPPLY

With the outlook on international shipping freight rates being subdued over the near to medium term and large tonnage expected to come on stream post 2012, the shipbreaking industry is expected to continue witnessing a steady supply of vessels for demolition over the medium term, says ICRA in a report.

Shipbreakers have witnessed healthy growth in operating income in recent years due to increased availability of ships for dismantling. But profit margins are inherently thin due to low value addition and the highly competitive nature of the business. Additionally, margins have come under pressure in the recent past due to steep rupee depreciation, which has increased the cost of purchase of ships, coupled with a decline in realisations of the end product (steel melting scrap) due to slowdown in the steel-consuming sectors.

K. Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA, said that regulatory risk remains high for the shipbreaking business. 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 event-based risks for Indian shipbreaking operators and may affect their competitiveness against players in other countries, he said.

Source: Business Line. (raja.simhan@thehindu.co.in). 28 September 2012

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