Over 90% of global trade by volume is carried out through coastal route, which implies a great number of ships on plenty of voyages. Although, since everything has a limited lifespan, ships that get unfeasible are demolished at ship-breaking yards and the scrap gets resold to various other industries.
Alang ship-breaking yard in Gujarat, India, is arguably the largest ship breaking yard in the world. Hence, India becomes one of the largest ship breaking destinations of the world. India, Pakistan and Bangladesh are the major countries involved in ship-breaking due to little labor & environmental regulations, cheap access to labor and favorable geography.
Global shipping and logistics conditions are inversely proportional to the ship breaking industry's condition. Since the global shipping industry is highly volatile with booms and busts of extraordinary margins and severe losses, the ship-breaking industry too go through high and low volumes. When freight rates are high, demolition rates go down as few owners are willing to let go of existing capacity whereas when freight rates are low, owners rush to scrap old and high maintenance vessels as they eat into their profits if not increase their losses. The time of 3-4 years taken to build a new ship abets a big void between supply and demand leading to this highly cyclical nature of the shipping business.
SCRAP
The major scrap component out of ships is steel. Steel prices dictate the ability of ship breakers to bid for ships to break. Scrap steel plate prices in India directly affects the prices ship-breakers are willing to pay for the ships. Indian steel industry and demand is thus a driving force for the Indian ship- breakers to flourish.
The steel from scrapped ships is recycled to make new steel products and is the major raw material for steel making through electric arc furnace method. More than 70% of scrapped steel from ships is recycled using the EAF method.
STEEL OUTLOOK
The EAF method of recycling steel is both economically and environmentally favorable. One of the major components used in this method is Graphite Electrodes. China remains the leading producer of electrodes, undercutting Indian producers' prices by a wide margin. The Indian Govt. thus, levied an anti dumping duty on Chinese imports in 2015. This led to cost increases in steel producers using the EAF method which then negatively affected the scrap steel prices. But in September 2018, the Govt removed all anti-dumping duties on Graphite Electrodes. This is positive as Indian producers can now source cheaper electrodes leading to improved margins. This may increase the demand for scrap steel which is a great positive for Indian ship breakers at Alang.
The Govt also has committed to spend Rs. 100 lakh crore on infrastructure in the next 5 years and make India a 5 trillion dollar economy. This healthy demand and limited capacity growth in coming years is a positive for the Indian steel industry and thus for the Indian ship breaking industry as well.
OPINION
Although there are no listed players in the ship breaking industry, it can be a useful space to watch the developments in both the steel and shipping industries of India & can present quite a few opportunities in times to come.