Global ship recycling tonnage falls over 20% y-o-y in Jan-Sept'24. Is market recovery in sight?

• Bangladesh remains top scrap ship demolition destination
  
  
• Total tonnage drops sharply in key South Asian markets
  
  
• Currency volatility, low steel demand major headwinds
  
  

Morning Brief: The global ship-breaking market remained in deep waters in the first nine months (January-September) of 2024 (9MCY'24). Total tonnage sunk 22% to 1.38 million light displacement tonnage (LDT) compared to 1.77 million LDT in the same period of 2023, as per data available with BigMint.

Key South Asian markets

Bangladesh remained the largest market globally in terms of tonnage similar to that of last year. However, Bangladesh concluded 9MCY'24 with total tonnage dropping over 15% to 681,342 LDT against 797,662 LDT in 9MCY'23. However, an increasing number of yards in Bangladesh are getting HKC ratified.

The country also led in terms of vessels demolished, at 115 units. However, compared to 9MCY'23, number of ships recycled dropped 23% y-o-y.

India, on the other hand, witnessed tonnage plunging by 42% to 511,051 LDT in 9MCY'24 versus 883.074 LDT in the corresponding period of last year. Moreover, the number of ships demolished, too, dropped 26% to 69 from 93 in 9MCY'23.

Surprisingly, Pakistan processed nearly double the tonnage y-o-y in 9MCY'24 at around 183,642 LDT, marking a significant jump of 100% in comparison with 91,915 LDT recorded in 9MCY'23. The number of vessels recycled in Pakistan surged remarkably by 118% to 24 from a mere 11 in the same period last year.

Declining price trajectory

Ship demolition scrap prices fell y-o-y. Container prices in India fell by 7% on average to $530/LDT in 9MCY'24 from an average level of $567/t reported in same period last year. Bangladesh witnessed the highest drop of around 8% to $544/LDT from $593/LDT in the year-ago period.

Pakistan's container prices witnessed a slight drop of 3% $535/LDT from $551/LDT in 9MCY'23.

Factors impacting market

India: The Indian Rupee fluctuated significantly reaching all-time lows against the US dollar. This depreciation raised import costs for recyclers who rely on foreign purchases, squeezing profit margins. Additionally, high inflation and elevated operational costs discouraged aggressive bidding for vessels.

The Union Budget, while supportive of infrastructure development, failed to deliver targeted support for the ship recycling sector, sources confided to BigMint. Consequently, the influx of cheaper Chinese steel significantly undercut local steel prices, which fell over the quarter and throughout the year, reducing the profitability of Alang recyclers.

With demand for recycled steel cooling, the number of vessels arriving at yards in South Asia dropped.

Pakistan: The Pakistani Rupee saw similar volatility, trading at around PKR 277.50 per USD. This instability, combined with USD liquidity shortages being experienced by Pakistan, increased financing difficulties and dampened buyer interest. The higher exchange rate amplified costs, reducing profitability and deterring new vessel acquisitions.

New customs duties and taxes were implemented in the country, including a 2% duty on incoming vessels and increased import taxes on steel products. These added around $10-15 per LDT to the cost of vessel purchase. The increased duties and overall higher operational costs discouraged buyers, pushing Gadani recyclers to adopt a selective approach to purchase.

Bangladesh: The Bangladeshi Taka, too, depreciated quite a bit. As a result, Chattogram recyclers struggled with rising operational costs and increasingly limited cash flow, further constrained by local economic instability.

Political instability worsened after Prime Minister Sheikh Hasina's resignation, creating an environment of economic and regulatory uncertainty. These developments slowed vessel transactions and created hurdles for recyclers. Overall instability, combined with currency depreciation and logistical challenges, saw Chattogram's steel prices dipping.

Seasonal, environmental factors: The monsoon season across South Asia disrupted operations in India, Pakistan, and Bangladesh. Labour shortages and operational delays in Alang, Gadani, and Chattogram limited processing capacity, affecting production and causing delays in vessel processing. In Bangladesh, flooding added further disruptions, especially in Chattogram, where logistical challenges compounded the effects of reduced labor availability.

Lower global steel demand: With demand for recycled steel cooling, the volume of vessels arriving at yards in South Asia dropped. For instance, Alang, India's largest ship recycling hub, received only around 60,000 LDT in July and continued to face low tonnage throughout the quarter. In Pakistan, Gadani processed around 45,000 LDT in July but saw a sharp drop in activity in subsequent months. The lack of demand was further exacerbated by the global economic environment, which saw decreased activity in the construction and manufacturing sectors.

Outlook

While global market sentiments throughout 2024 have been bleak, the Indian market is witnessing a slight improvement in October, with Chinese central bank stimulus measures offering hope of steel demand strengthening in Q4CY'24.

However, Bangladesh is likely to remain under pressure, with inclement weather, economic and political instability and LC issues continuing to weigh on the market. On the other hand, the Pakistani market is likely to remain subdued, as steel demand remains weak amid liquidity constraints which are acting as a brake on scrap consumption.