Global ship recycling tonnage drops 25% y-o-y in Q1CY23. Will demand look up soon?

• India strives to complete with Bangladesh
  
  
• Bangladesh's demand seesaws, Pakistan remains mute
  
  
• Demand may revive post-Eid
  
  

Morning Brief: The total global ship-breaking market continued to swim against the tide in the first quarter (Q1) of calendar 2023 (CY23) showing a 25% or almost 0.20 million light displacement tonnage (LDT) drop, reveals data maintained with SteelMint. The total tonnage was recorded at 0.60 million LDT in January-March 2023 (Q1) compared to 0.80 million LDT registered in the same quarter in CY22.

Total vessel volume recycled in 2022 amounted to 3.19 million LDT.

India, Bangladesh and Pakistan together enjoy over 90% of the global ship recycling market.

"Ship recycling activity is significantly slower this year than last. Right now, there are no sellers in the market. It is also not feasible to match high vessel selling rates from the buyer side," said a source.

Prices: Average prices in Q1 in India for bulkers were $530/LDT, $550/LDT for tankers and $560-570/LDT for containers, informed a source in Alang. Bangladeshis were bidding - provided they received LC facilities -$20-30/LDT higher compared to Indians across vessel categories but this was for a short period -around February.

What factors are taking the wind out of shipbreaking sails?

India: India rode the crest of the vessel recycling wave last year, steaming past Bangladesh. It still held its No.1 position in Q1 but the overall scenario was subdued due to certain factors. First, over the past one month or more, it was not able to compete with Bangladesh. The latter's primary raw material source for crude-steel-making being ship-recycled scrap, its buyers bid aggressively. When Indian buyers were offering $550-570/LDT for container vessels, Bangladeshis offered at around $640/t and took away the deals from the Indians, albeit for a short period.

Secondly, there was not much supply of vessels from the international sellers either. Players in Alang said they usually get a lot of details (specs) for ship demos at this time of the year. However, this trend has not picked up yet, possibly because the freight market is stable at present- it has dropped quite a bit since the Covid era but has stabilized since. Hence, there is not much supply for demolition since many of these vessels are being re-diverted for refurbishment and then chartering, which are fetching better margins. "There were two-three container vessels available for demolition in the market but these were soon scooped up by a shipping company in a second-hand sale. These will be refurbished and used for chartering soon, we heard," said a source.

Thirdly, demand for finished steel in the secondary sector has been tepid, warranting little demand for scrap. "The Alang yards are sitting with ferrous scrap at INR 40,000/tonne but there is no demand from the secondary furnaces or even rolling mills," rued a source indicating that Q1 was no different.

Bangladesh: This country, along with Pakistan, continued to be buffeted by waves of LC issues in Q1 because of dwindling foreign reserves and thus both were not able to score any tonnages.

But unlike Pakistan, Bangladesh received a booster shot of $4.7-billion IMF aid in February, and thus was able to replenish its forex reserves soon enough and the central bank resumed opening fresh LCs for vessels on project basis. "Ship-breakers applied for an LC on each vessel and the authorities vetted the same on the basis of the project and its profitability and granted accordingly," a source informed SteelMint.

Consequently, some deals did happen in Bangladesh in February, with the injection of liquidity but the market slowed down from March because the central bank again attempted to control forex reserves.

"We did see some vessels entering in January but there were none soon because of lack of LCs. The dollar crisis and currency devaluation are huge challenges," said a Bangladeshi source.

Ships were very costly in Q1. As per the estimates of Bangladshi buyers, prices ideally should have hovered around $550/LDT but were actually at around $620-640/LDT. "Converting the taka into dollars is a huge drain on foreign exchange resources," said the source, adding that this led to tightening of LCs again.

Pakistan: This country has been fighting with its back to the wall. It has no foreign reserves to speak of and its economy is straining to keep its head above water. The ship-breaking industry has not received any government support either.

Outlook

End-April or starting May, some positivity may return to the ship recycling market once the holy month of Ramzan gets over.

"Ramzan is a slow month in terms of finished steel offtake. Post-Eid, we will know where the demand for hot rolled coils, rebar, plates and other finished goods is headed. Thus, we are hopeful that ship-breaking demand will start resuming from the third week of April," said a source in Alang.

If Indian buyers, a few weeks back, were concerned at the aggression with which Bangladeshis were buying, the recent slowdown has made them breathe easy that the game might come back in their favour.

In terms of prices, if local steel demand stabilizes then Indian ship recyclers would be able to bid decently. The last container ship sold in Alang at $595/LDT a week back, and many say this is a "risky" (read high) price and they would be comfortable paying $560-570/LDT henceforth for a container vessel.

"The current price of a container vessel is $590/LDT. If it drops by $20-30, it will be commercially viable. So, the rest of the year will be determined by price viability," remarked another source.

Pakistan is currently not in the game and there is no clarity on when it will swing back either.

Meanwhile, as per a report, a Jubail-based company is planning to set up an environment-friendly ship recycling facility in Saudi Arabia which may pose a challenge to the Alang recyclers in the long term.