Indian Ship Recycling Industry Set for a Rebound: Up 15% Growth Expected

Indian Ship Recycling Industry Set for a Rebound: Up 15% Growth Expected

The Indian ship recycling industry is expected to see a significant turnaround after two years of decline. Analysts predict a growth of nearly 15% in revenue this fiscal year, following drops of 22% and 8.5% in the previous two years. This positive outlook is driven by two key factors:

1. Increased Availability of Old Ships: The global shipping industry is constantly adding new vessels, leading to a rise in the number of older ships reaching the end of their operational life and needing to be recycled. This increased availability of aging vessels translates to lower costs for Indian ship recyclers when purchasing these ships for dismantling.

2. Competitive Edge over Rivals: Indian ship recyclers hold a competitive advantage compared to their main competitors, Bangladesh and Pakistan. This advantage is due to factors like currency exchange rates and operational efficiency.

Benefits of the Boom:

• Improved Profitability: The combination of lower input costs (due to cheaper ship purchases) and higher capacity utilization will lead to a significant improvement in operating profitability for Indian ship recyclers. Analysts predict a 75 basis point increase, reaching 6.5% this fiscal year.

• Stronger Financial Health: The projected growth will generate higher cash flow for ship recycling companies. Additionally, the absence of major capital expenditures (due to sufficient yard capacity) and healthy existing balance sheets will contribute to stable credit profiles.

Reasons for Increased Ship Dismantling:

A recent study by CRISIL Ratings analyzed data from 22 major Indian ship recyclers, representing nearly half of the industry’s revenue. The study highlights the trend of rising ship decommissioning:

• Global Shipping Trends: The ongoing expansion of global shipping capacity, particularly in container and dry-bulk fleets, is expected to put downward pressure on freight rates in the medium term. Container fleet capacity alone is projected to increase by 10% this fiscal year.

• Economic Impact on Aging Ships: As freight rates decline, operating older vessels beyond their prime becomes less economical. The high cost of repairs and insurance for these ageing ships will incentivize owners to send them for dismantling sooner.

India’s Competitive Advantage:

India is expected to capture a significant share of this growing market for condemned vessels. This dominance is attributed to the country’s competitive edge in the ship recycling industry compared to its key rivals:

• Currency Challenges for Competitors: Both Bangladesh and Pakistan are currently facing difficulties obtaining foreign currency. This makes it more challenging and time-consuming for their ship recyclers to purchase condemned vessels. As a result, ship owners are looking elsewhere, potentially towards India.

• Market Share: India, Bangladesh, and Pakistan collectively handle approximately 85% of the world’s ship recycling volume. India’s expected growth will likely come at the expense of its competitors.

Profitability Boost:

There are two main reasons why operating margins are expected to improve for Indian ship recyclers this fiscal year:

1. Lower Purchase Costs: The increased availability of condemned ships will drive down purchase prices by an estimated 6%.

2. Volume Efficiency: The projected rise in ship recycling volume will lead to better cost efficiency thanks to improved capacity utilization, expected to reach around 50%.

Financial Health and Future Considerations:

The positive outlook for the industry translates to stronger financial health for Indian ship recyclers:

• Increased Cash Flow: With higher revenue and improved profitability, the cash flow of ship recycling companies is expected to increase by 20% this fiscal year.

• Stable Credit Profiles: The absence of major capital expenditures due to sufficient yard capacity, coupled with healthy balance sheets, will ensure stable credit profiles for these companies. Key financial ratios like interest coverage and gearing are expected to improve, reflecting a stronger financial position.

Looking Ahead:

Despite the optimistic forecast, there are external factors to monitor:

• Geopolitical Disruptions: Geopolitical events can significantly impact global freight rates, which in turn could affect the demand for ship recycling.

• Steel Demand: The demand for steel, the primary product obtained from ship recycling, can also influence the industry’s profitability.

By closely monitoring these external factors, Indian ship recyclers can navigate potential challenges and solidify their position as a global leader in the industry.