Local Currency's Steep Fall
Drives Up Cost, Weak Economy Hurts Demand
NEW DELHI—The world's largest
shipbreaking yard at Alang on India's western shore is hit by a double whammy.
The rupee currency's deep dive has driven up their cost, while a slowdown in
the local economy has sapped demand for scrap steel.
"About 90% of the industry
is in trouble because of the rupee's slide," said Nitin Kanakia, joint
secretary of the Ship Recycling Industries Association of India.
That is because ship recyclers
pay in U.S. dollars for the ships they buy to break down. They often take bank
credit, to be repaid in three to nine months. Most in this low-margin business
don't hedge against the risk of foreign-exchange volatility because of the
added cost, but that is now hurting them as repaying foreign-currency credit
costs more because of the rupee's weakness.
The local currency has lost about
16% of its value against the dollar since the start of May. The rupee was down
as much as 22% in late August, when hit a record low against the dollar.
The recyclers are unable to pass
on the higher cost to buyers of scrap metal, such as steel rolling mills, as
they too are facing a demand slowdown.
India's economy expanded 4.4%
during April to June, its weakest pace since the first quarter of 2009. Many
economists expect economic growth in the fiscal year through March to be equal
to or less than last year's decade-low pace of 5%. The weak economy has hurt
demand for steel from sectors such as automobile and construction.
The low-cost, ship-scrapping
industry at Alang town of Gujarat state is a multibillion-dollar business,
employing tens of thousands of workers. As many as 394 ships arrived at its
shores for breaking down in the financial year ended March 2013.
Arrival of ships has dropped by
almost half of the monthly average since to 17 in August, said Mr. Kanakia of
the Ship Recycling Industries Association.
This has affected jobs, though the
impact is "minimal right now," said Mr. Kanakia. "If this
situation continues and yards close down, then it would certainly have a big
impact on employment."
According to Mr. Kanakia,
companies in the Alang ship yard employ about 30,000 workers. Another about
500,000 people are employed in shops selling secondhand goods and by
scrap-metal processors, he said.
Ship breakers sell contents such
as furniture and dinnerware from the ships they break down, but most of their
revenue comes from recycling steel that typically comprises about 85% of the
weight of a ship.
"The demand for finished
steel is not growing at all," said Chintan Kalthia, owner of Kalthia Ship
Breaking Yard. "But our costs have gone up because the rupee has lost
value."
Scrap steel from recycled ships
now sells for about 23,800 rupees ($373) a metric ton, around the same level as
three months ago.
The price of old ships has fallen
by 8%-10% since early June—to around $370 a ton—but that isn't enough to offset
the impact of the weaker rupee.
The weak rupee has hampered the
ability of Indian ship recyclers to bid for ships and they are now losing out
to rivals in Pakistan and Bangladesh, Mr. Kalthia said.
Ship breakers in those two
countries are mostly unaffected by currency fluctuations. The Bangladeshi taka
is around the same level against the dollar now compared with early May, while
the Pakistani rupee has depreciated by about 5%.
However, a top official of the
Bangladesh shipbreaking industry said companies there had not benefited from
the loss of business in India. "The demand for the steel
plates from ships has gone down. There are just no takers," said Hefazur
Rehman, president of the Bangladesh Ship Breakers Association.
He said the price of the steel
plates had fallen by 8,000-9,000 Bangladeshi takas ($102-$115) in the past
three months to around 31,000-32,000 takas a ton.
"Our business is quite bad.
People are suffering losses," said Mr. Rahman, saying that the Bangladesh
economy was also suffering with the country gearing up for elections, to be
held early next year.
But business conditions are far
worse at Alang in India.
"There is no viability in
the business, so everything has stopped in the last two months. We can't
purchase new ships," said Vikas J. Patel, managing director of Appolo
Vikas Steels Ltd.
Mr. Patel's company owns two
plots at Alang's ship yard, each employing about 150 contract workers.
Source:
Wall Street Journal. By BIMAN MUKHERJI. 13 September 2013
http://online.wsj.com/article/SB10001424127887323392204579072423782097270.html
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