Recent meltdown in steel scrap prices, coupled with decline
in rupee value against the dollar, seems to have taken the wind out of the
sails of ship-breakers in the country.
The 12-month period saw domestic steel demand muted,
resulting in a 23 per cent decline in average realisation on scrap steel (a key
raw material in secondary steel making) from ₹26,504 per tonne in October 2014
to ₹20,398 in September 2015, said credit rating agency Crisil in a note on
Monday.
20% fall in steel prices
“The price of scrap steel, which was declining between 2 and
4 per cent on a monthly basis, plunged nearly 20 per cent after China moved to
de facto devalue the yuan in August 2015,” the Crisil note said.
The industry operates on a short cash cycle. A small ship is
dismantled in six months. However, scrap is sold every month. Given the sharp
decline in the price of scrap steel since August, the industry, despite its
operating discipline, is estimated to have taken a knock of ₹120 crore.
Rupee depreciation
Around 9 per cent depreciation in rupee in the 12 months to
September 30 – touching ₹66 a dollar from ₹61 a dollar seen in October 2014,
has added to the woes. Today it is ruling ₹66.02 a dollar. The industry in the
last past three fiscals incurred about ₹1,200-crore loss in foreign exchange.
As a practice, ship-breakers buy condemned vessels based on
letter of credit in foreign currency, which typically has a maturity period of
six months. Indian ship-breakers, however, do not hedge foreign currency
exposure, as the hedging cost is perceived to have additional depressing impact
on their thin operating margin of 4-5 per cent.
In the October-September period, the value of LCs opened by
59 Crisil-rated ship-breakers, accounting for around half of the industry’s
size, is estimated at around ₹1,600 crore.
Average exchange rate at opening LCs was ₹63 to the dollar.
Crisil assumed that payout was done at an average exchange rate of ₹65 to the
dollar, causing industry-wide forex loss of about ₹100 crore as on September
30.
Slowdown at Alang
The average number of ships dismantled at Alang in Gujarat
dwindled from the industry peak in 2013. To shorten their operating cycle
further and to contain the impact of volatile currency and steel prices,
ship-breakers have been buying smaller vessels.
“Promoters with deep pockets have so far managed to sail in
these choppy waters. The worry is, if steel prices don’t rise and the rupee
remains volatile, the world’s largest graveyard (Alang) for ships could turn
one for ship-breakers, too”, said Crisil.
According to industry observers, environmental issues
(deaths and chemical spills are not uncommon, as unsafe dismantling processes
and lack of yards for scrap vessels on the Alang beach) could bring doom to the
industry.
European Commission is planning to introduce controls on
beach scrapping. It is likely to allow in the near future an EU
country-registered vessel to be scrapped only at approved yards with proper
facilities as those in China or Turkey.
Source: the hindu businessline. 16 November 2015
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