India surpasses Bangladesh to become top ship recycler in 2022

?India surpassed Bangladesh to become the largest ship dismantling market in 2022 in terms of tonnage. Bangladesh had been the leader in ship-breaking volumes over the last five years.

India ended 2022 with a leading 1.20 million light displacement tonnage (LDT), 21% down y-o-y against 1.52 LDT in 2021. Bangladesh's volumes plunged 57% y-o-y to 1.13 LDT (2.63 LDT in 2021) while Pakistan showed an equally steep drop of 58% to 0.42 LDT (1 LDT in 2021).

It may be noted that these three South Asian markets together contribute over 90% of the global ship-breaking industry in tonnage terms.

Reasons for the changed scenario in ship-breaking industry

India fares better but volumes drop:?The country fared slightly better, although tonnage fell 21%, because its currency depreciation was slightly lesser than that of the Bangladeshi taka and Pakistan's rupee.

Secondly, the credit availability was marginally better in India than in the other two South Asian nations. The ship-breaking industry, involving huge fund values, works predominantly on credit. It takes 2-3 months for a ship to get procured, dismantled and then find its way into the market to be procured as scrap or plates. And this entire cycle is mainly funded through credit. However, dismantlers in India faced lesser funding issues compared to their counterparts in Bangladesh and Pakistan.

Thirdly, steel production increased in India which led to higher demand for ship-breaking scrap. India's crude steel production was up 6% y-o-y.

However, despite these supportive factors, volumes were down 21% because:

1. Indian mills were unable to export, disadvantaged by the export tax, amid higher production. Around 80% of the ship-breaking material is meant for re-rolling by standalone re-rollers. With higher volumes of plates being diverted by tier-1 mills into the domestic market at competitive prices, standalone re-rollers procured lesser ship-breaking tonnage.

2. Another factor is that amid the global currency volatility experienced last calendar, there was uncertainty over the resale value of ships which also restrained many fresh vessels from getting beached.

3. That apart, trends reveal that plates prices were higher compared to hot rolled coils (HRCs) in 2022. Russia and Ukraine used to export a considerable volume of plates which got disrupted by the war. This led to short supply of the material, raising its (plate) prices and impacting demand.

4. Lastly, a good number of vessels which were not beached in Bangladesh could have headed India's way but did not because of draft issues. Bangladesh's Chattogram Port has deeper draft and can handle large bulk vessels unlike India's Alang.

Bangladesh' LC issue almost stalls ship-breaking activities: Not only did Bangladesh slide to second position, but its volumes also plunged more than 50% too essentially because of the letter of credit (LC) issue. Very few LCs could be opened in 2022 as the government faced a drained forex exchange reserve. It forbade businesses from opening fresh LC accounts.

"There is a dollar crisis in Bangladesh, because of which the government is not allowing businesses to open fresh LCs, and ship-breaking has been badly hit. Currently, mostly all ship-breaking activities are stalled. Only a few players who were able to arrange a dollar back-up could open fresh LCs - that too for very small volumes of 1,000-2,000 tonnes," informed a Bangladeshi ship-breaking source.

That apart, the overall steel scenario has taken a hit in Bangladesh too. For one, there have been power supply issues because of the spiralling energy prices and thus mills were told to curtail production while consumption also dropped.

Additionally, the sliding currency made purchase of ships costlier.

Pakistan faces challenges: This country too faced similar issues as Bangladesh in terms of lower steel demand, power outages and LC openings which saw its tonnage plunge 58% y-o-y.

Outlook

In India, vessel buyers are cautious amid news of global recession looming and players with outstanding contracts with furnaces and mills are only buying at present. Dismantlers with no outstanding contracts are happy to wait and wait.

But they are upbeat in terms of both prices and demand. A source informed SteelMint that with freights showing a downtrend, this will have a cascading downward impact on vessel prices. "Bulk vessel freights are going down since it is business-as-usual with Covid receding and vessel availability has normalized to a considerable extent. Thus, freights are also normalizing. This means vessel prices will come down and benefit ship breakers in the short to medium term. We are hoping for prices to reduce in the next 2-3 months," informed a ship-breaking source in Alang.

Where demand is concerned, in the medium to long term, ship-breakers see decent demand emerging in India because of the government's infra push.

Bangladeshi sources feel that the status quo will sustain into the medium to long term in terms of LCs, till the elections are over.