How market speculators in China upended life in India’s ship-recycling yards
ALANG, India—In the world’s biggest ship-recycling yard, dozens of men toil under a blazing sun, carving up the remaining portion of a vessel on the seashore. During the nearly five months it has taken for the ship they are working on to arrive at the yard and get broken apart for scrap, the price of the steel the yard is culling has skyrocketed, then plummeted—dragged along by roller-coaster trading thousands of miles away in China.
The yard owners of Alang, where half of the world’s ships are recycled, say they are shocked by the volatility—the like of which they hadn’t seen since the global financial crisis in 2008. Many of the yards here, in the western Indian state of Gujarat, are saddled with losses from buying near-record numbers of boats when steel prices were surging earlier this year, then selling the scrap metal after prices had crashed.
Now, though steel prices in China have risen from a May low, the scrappers are struggling with a glut of metal in India that is keeping a lid on domestic prices, and have slammed the brakes on more ship buying.
“From last December onwards, we saw prices improving suddenly, so all of us purchased ships,” says Ramesh Aggarwal, yard owner at Alang’s Hooghly Ship Breakers Ltd. “Now all of us are facing a similar situation because of the fall in prices. Our profits have been wiped out.”
The whiplash rattling the multibillion-dollar ship-recycling industry illustrates how the rapid growth of commodities futures trading on China’s still largely closed domestic markets is rippling into the real world. The industry is a leading employer in Bangladesh, and an important one in Pakistan and India, providing jobs for hundreds of thousands of mostly poor workers.
The volatility coincided with the global shipping industry coming under pressure even as demand for its services have been rising. The crunch in global trade has left owners sitting on too many ships and eager to sell them for scrap.
Until a few years ago, Alang’s yards watched steel prices quoted in both international and South Asian markets to decide whether to buy ships, and how much to pay for them. Those prices rose and fell largely in line with supply and demand for the metal in markets like China, which is the world’s largest producer and consumer of steel.
That dynamic changed when China’s breakneck growth started to slow several years ago. The country kept its forges blasting while many other global steel producers cut theirs back. That made China more dominant in global steel markets even as prices plummeted due to a surplus of the metal. China has comprised around half of the world’s steel output since 2013, versus nearly a third in 2008. Last year, China’s steel exports alone topped the total steel output of the No. 2 producer, Japan, and were around 40% more than the total production of the U.S.
Alang’s scrapyards, which sell to Indian buyers, began to contend with a flood of cheap steel from China, and its scrap prices started to more closely track steel prices in China, reflected in futures contracts traded in Shanghai.
Shanghai’s influence on Indian scrap-metal prices “has increased substantially over the past one-and-a-half years,” said Anil Sharma, chief executive officer of GMS, the world’s largest buyer of ships and offshore assets.
Late last year, Shanghai’s futures markets started heating up. Opportunistic Chinese traders saw low steel prices as a buying opportunity, and poured millions of dollars into futures contracts for steel rebar, a reinforcing rod used in construction, and iron-ore, a steelmaking component. Prices of steel rebar shot up by more than 50% in the first four months of 2016.
In Alang, shipyards whose businesses had slowed during the steel-price slump of the past few years rushed to buy boats, spending millions of dollars per vessel. During the first six months of this year, 185 vessels arrived at Alang’s yards -- nearly equal to the 196 for all of last year. Workers started pouring into Alang from surrounding villages, drawn by the extra jobs.
Rocking the Boat:
China's volatile trading in steel has disrupted India's ship-scrapping industry.
China steel-rebar price:
Ships arriving for scrapping in India:
India scrap-steel price*:
Note: 1,000 yuan=$150.30; 10,000 rupee=$149.80 *Heavy Melting Scrap-II, an Indian benchmark Sources: Future Source data (rebar price); Ship Recycling Industries Association (ship arrivals); India Steel Market Watch (scrap price)
The boom was short-lived. Chinese regulators, fearing a speculative bubble in commodities prices, raised the amount investors must deposit to trade iron ore and steel rebar. Prices on Chinese exchanges began tumbling in late April and collapsed in May, falling nearly as low as they were at the start of the year.
The rapid seesaw in prices—which fell as much as 30% in four weeks—caught yard owners like Mr. Aggarwal off guard. The yards operate on razor-thin margins, without hedges, and they typically won’t buy boats if they think prices will fall significantly during the three or four months it takes between the purchase of a ship and the time it is disassembled for scrap. The whipsawing prices this year meant expected profits for their scrap metal turned to losses for most owners.
The last portion of the majestically-named M.V. King David, a bulk carrier once used to fetch iron ore from Australia to China, is beached for scrap at Hooghly Ship Breakers Ltd. PHOTO: KARAN DEEP SINGH/THE WALL STREET JOURNAL
Some yards tried to renegotiate contracts after the vessels arrived; others held on to the metal hoping prices would rise again.
One yard owner, who asked to remain unnamed, said he bought a ship in January for around $280 per ton, including the cost of labor. He ended up selling the scrap metal at a loss, for $250-$260 per ton, when the ship was being broken up in April and May.
Workers at a shipyard in Alang use a cable to haul the last portion of the M.V. King David, a bulk carrier that was sold to be broken down and turned into scrap steel. Such ships also contain furniture, microwaves, dinnerware and other goods, which end up being sold at a local bazaar. PHOTO: KARAN DEEP SINGH/THE WALL STREET JOURNAL
“You can say we are caught in a casino-like situation,” said Mr. Aggarwal, who is also the secretary of the Ship Recycling Industries Association (India).
Prices of steel rebar futures in Shanghai have risen again since late July to just below the highs in April, but Indian scrap prices have lagged behind due to excess supply. Shipyard owners say they are cautious about making fresh purchases after being badly bruised by the previous volatility.
In the rows of wooden shacks that house thousands of workers at one yard in Alang, many men are waiting without pay in case more ships arrive, but face the prospect of returning home with no money for their families.
Many poor men head to Alang seeking higher paychecks than they can earn back home. Above, a worker cuts through metal at R.L. Kalthia Ship Breaking Pvt Ltd. in Alang, India. PHOTO: KARAN DEEP SINGH/THE WALL STREET JOURNAL
Sushil Kumar Pal, 20, is worrying about money for his two younger brothers’ schooling and for his elderly parents.
“There are so many workers here and not enough jobs going around,” he says. “So how will anyone work?”
Source: wall street journal. 5 September 2016