Friendly waters

The global supply chain, which was affected by the coronavirus pandemic, could take time to regularize following Russia’s invasion of Ukraine. However, the resulting rise in ocean freight rates has created a favorable market for shipowners.

Tankers, which were the most recycled segment as COVID-19 lockdowns in India eased in 2021, also have seen a spike in chartering rates, making ship owners defer recycling their aging units, according to Best Oasis, a Greece-based cash buyer of ships and energy assets for recycling worldwide. 

Moreover, a global shortage in metal scrap is lifting scrap prices. In the benchmark Turkish market, the Davis Index for U.S.-origin heavy melting scrap (HMS) 1&2 (80:20) was $652.80 per metric ton cost and freight (cfr) March 31, up from $520 per metric ton cfr Feb. 28. In India’s ship recycling market, the index for melting scrap rose by 4,000 rupees ($52.65) per metric ton from Feb. 28 to 48,000 rupees ($627) per metric ton ex-yard Alang March 31, which could keep owners of older vessels bullish as they cash out. 

Steel prices also have increased, gaining support from disrupted supply chains and higher raw material costs. In India, the Davis Index for ingot was 57,500 rupees ($751) per metric ton delivered to Mandi Gobindgarh consumers March 31, up from 52,800 rupees ($690) per metric ton Feb 28.

Recyclers, however, are faced with increased risks because of elevated buying prices and little-to-no room for further increases in selling prices. A vessel bought at present price levels could take three to six months for dismantling, with scrap realization occurring at future price levels. As a result, recyclers potentially could bare losses should scrap prices decline during that time. A spokesperson from Best Oasis, highlighting the short-, medium- and long-term outlook for the ship recycling industry in India, says a further gain in steel prices has a low probability, exposing recyclers to higher risks and squeezed profit margins in the short term amid the war.

Growth opportunities

The Indian government’s thrust toward increasing steel production and consumption is expected to drive demand for steel scrap in the medium to long term. 

Under its National Steel Policy, India seeks to raise steel production capacity to 300 million metric tons from 110 million metric tons and crude steel capacity to 255 million metric tons by 2030. A U.S. International Trade Administration report estimates ferrous scrap use in India to reach 75 million metric tons by 2030 from 32 million metric tons in 2019. Of the 2019 total, 25 million metric tons were sourced from the domestic market. Thus, along with auto scrap and imports, the ship recycling industry in the country also is set to expand.  

In the near term, the number of ships coming to Indian recycling yards is expected to rise with infrastructural development and growing awareness within the international shipping community about sustainable practices, Best Oasis says.

Booming end-user industries and growing export markets for Indian steel also will enable the recycling market to absorb more tonnage and remain competitive in the subcontinent market in the medium term, Best Oasis adds.

This, however, is subject to the improvement of yards in Bangladesh and Pakistan and the comparative prices offered by buyers from these markets. Unlike these two countries, which are heavily dependent on ship recycling to meet the demand for raw material in the domestic steel market, the Indian steel industry does not depend on scrap steel from ship recycling. Thus, prices offered by recyclers from Bangladesh and Pakistan are higher and more attractive for ship owners. 

A dip in shipbreaking

The shipbreaking activity at Alang, the world’s largest shipbreaking yard, has declined in the last decade. In 2011, approximately 398 vessels had beached there, followed by 436 vessels in 2012, Best Oasis data show. The number of ships almost halved to 212 vessels in 2021, with even the prepandemic year of 2019 registering only 189 vessels beached for recycling. 

The reason for the decline is attributed to the European Union’s stance to block ships for dismantling in India, citing noncompliance with international standards. Although approximately 95 percent of India’s yards are Hong Kong Convention- (HKC-) compliant, the EU has kept them out of its approved list by stating a lack of hospitals and proper downstream waste management systems. 

Bangladesh, on the other hand, has one HKC-certified yard, with 15 more undergoing certification. Pakistani yards are being upgraded to comply with the requirements of the convention. The costs associated with recycling, therefore, are lower for yards in Pakistan and Bangladesh compared with those in India, where most yards are HKC certified. Recyclers in these two countries, therefore, bid higher.

Chintan Kalthia, CEO of R. L. Kalthia Shipbreaking in the Indian state of Gujarat, says competitive bidding by these other two subcontinental markets is a major reason behind declining activity at Alang. He says Alang needs 30 vessels per month to use its capacity but currently stands at 10 to 12 vessels per month.

However, the Best Oasis spokesperson says though the EU’s stance had a slight impact on the overall tonnage coming to the subcontinent, the availability of tonnage from other markets remains healthy.

Push for development

India’s Finance Minister Nirmala Sitharaman in the 2021-22 budget announced plans to raise ship recycling capacity at Alang. The plan seeks to double the capacity to 4.5 million light displacement metric tons by 2024. At present, Alang houses 153 yards, and the government plans to add 15 new plots to bring in more vessels from Europe and Japan. Data shows that of the total, 48 percent of the yards are used for ship recycling. 

The Indian government also has initiated the National Authority for Recycling of Ships (NARS), which is responsible for ensuring the ship recycling industry’s sustainable development is in line with HKC.

As an apex body for ship recycling in India, NARS will increase cooperation between ship owners, recyclers, state governments and international regulatory bodies, according to Best Oasis. By imposing a statutory duty on recyclers to ensure safe and environmentally sound recycling of ships, the organization will give the required boost to the development of Indian ship recycling yards as per the internationally recognized standards.

But Anand Hiremath, head of research and development, Global Marketing Systems, based in Dubai, United Arab Emirates, says that NARS will not have any ground-level impact on business as it is merely an administrative change.

Mayuri Phadnis is editor, Asia, at Davis Index and can be contacted at mayuri.phadnis@davisindex.com, while Rashi Shejwalkar is ferrous analyst, Asia, at Davis Index and can be contacted at rashi. shejwalkar@davisindex.com.