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.
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