Ship recycling activities at Alang-Sosiya in Gujarat’s Bhavnagar district – home to the world’s largest stretch of ship breaking beaches – have ground to a complete halt after India announced a three-week lockdown beginning March 24 to slow the spread of Corona Virus.
“All sub-continent recycling locations have gone into a complete lockdown this week, as the Coronavirus wreaks its devastating damage across the globe,” said Global Marketing Systems, Inc, (GMS), the world’s biggest cash buyer of ships for demolition.
All ships scheduled to arrive but are yet to beach at Alang have therefore been ordered to halt before entering port limits. Moreover, no-objection certificates to enter have not been issued by the port authorities, especially as ship recycling is not considered an essential industry to keep operational during the lockdown, GMS said.
As a result, for the first time in the history of GMS, with all recycling locations closed for the foreseeable future, it is virtually impossible to give price guidance for the sales as no offers / interest / numbers whatsoever have been forthcoming from any market,” it added.
South Asian yards (comprising India, Pakistan and Bangladesh) have emerged as the hub (about 80 per cent of the global ship-breaking output) aided by the natural geographical advantage and cheap manpower cost.
The availability of ships for recycling is inversely correlated to the freight rate of shipping vessels, which in turn is a function of the global demand for seaborne transport and supply of new vessels. A major portion of a ship breaker’s revenue comes from the sale of ferrous or mild steel (MS) scrap, the prices of which continue to remain subdued in the domestic market.
“The outbreak of Coronavirus has not only exacerbated the freight market but has also placed restrictions on vessels coming in and out of virus hit nations, as well as the trade routes; and deliveries in the region, thus adding to ship owners and buyers’ woes. The outlook for the sector has accordingly turned negative. Any meaningful recovery of scrap prices in the domestic market and stable foreign exchange rates thus remain important, given that the freight markets are expected to continue to suffer leading to steady flow of tonnage for recycling in the near term,” Suprio Banerjee, Vice President and Head, Mid-Corporate ratings, ICRA, said.
The only solace for the thousands of workers engaged in ship recycling is that there are no lay-offs and they are being paid wages.
“In these tough times, the ship recycling industry in Alang is aiding its workforce by ensuring zero lay-offs. In addition, wages will be paid to the workforce during the lockdown period. This indirectly addresses the interests of those organisations who use false labour rights allegations to defame the entire ship-recycling industry,” said Anand Hiremath, Head, Research and Development and Lead Coordinator, Responsible Ship Recycling at GMS.
The operating profit margin for the Indian ship breakers has remained low (average 1-2 per cent) during the past few years because of the low value addition, stiff competition from the domestic as well as the competing countries’ players and volatile scrap prices. The margin is also vulnerable to foreign exchange rate fluctuations as purchase transactions are denominated in the US Dollars, ICRA said.
Purchase of ships is generally backed by a Letter of Credit (LC) in India. Tightening of banking norms for issuance of LCs to purchase ships, is further adding up to the challenges faced by the Indian ship recyclers.
“The industry players are facing turbulent times currently with volatile scrap/steel plates prices, unfavourable foreign exchange rates and restriction on beaching of vessels, which will lead to increase in the procurement cost. This coupled with unsettling sales/scrap prices, the margins for ship breakers are expected to remain under pressure in the near term,” said Mayank Agrawal, Assistant Vice President, ICRA.