Dr.G.R.Balakrishnan Jun 21 2024 Shipping News (Ship Recycling, Repair & Management)

Good days ahead for Indian shipping recycling industry

 If things move the way it has been envisaged, the Indian ship recycling industry will see the sector’s revenue grow nearly 15 per cent this fiscal after two years of decline of 22 per cent in fiscal 2024 and 8.5 per cent in fiscal 2023.

The growth will be supported by two factors. Foremost is the increased availability of ageing vessels for recycling due to addition of new vessel capacity globally. Secondly, the higher competitiveness of Indian ship recyclers compared with the key rival nations, Bangladesh and Pakistan. The increased availability of ageing vessels will bring down input cost for ship recyclers.

This, along with higher capacity utilization leading to better efficiency, will improve operating profitability by 75 basis points (bps) to 6.5 per cent this fiscal. Higher cash generation and absence of capital expenditure (capex), along with healthy balance sheets, will keep credit profiles stable for Indian ship recyclers. A recent CRISIL Ratings analysis of 22 ship recyclers, accounting for close to half of the industry revenues of Rs. 4,400 crore, indicates as much.

Going by the study, the addition of ship freight capacity for container and dry-bulk fleet globally will bring down the freight rate over the medium term. In fact, container fleet capacity alone is expected to increase 10 per cent this fiscal. The lower freight rate will make ageing vessels operating beyond their age limit uneconomical due to high repair and insurance cost, which, in turn, will lead to increase in vessels available for dismantling globally. Indian ship recyclers are expected to grab a lion’s share of the increased volume of condemned vessels, given their higher competitiveness leading to likely volume growth of around 20- 23 per cent.

The country’s main competitors Bangladesh and Pakistan are facing a severe crisis of foreign currency (non) availability and their ship recyclers are, as a consequence, taking a long time to complete vessel purchases and owners of condemned vessels are avoiding these markets. For the records, these three countries account for 85 per cent of the global ship
recycling volume. Operating margins are improving this fiscal for two reasons.

First, increased availability of condemned vessels is likely to bring the purchase cost down by nearly six per cent, while output (scrap steel) prices are expected to remain firm. Second, the increase in volume of ship recycling will lead to better cost efficiency as capacity utilization is seen improving to nearly 50 per cent. With higher revenue and improved profitability, the cash flow of ship recyclers rated by CRISIL Ratings is expected to increase 20 per cent this fiscal.

Moreover, the absence of capex as yard capacity utilisation will remain around 50 per cent and healthy balance sheets will keep credit profiles stable. The interest coverage and gearing are expected to improve to four times and 1.1 times, respectively, this fiscal as against the 3.6 times and 1.2 times in the last three fiscals. At the end of the day what is important is that geopolitical disruptions and their impact on freight rates, as well as steel demand can be monitored.