Bangladesh, a country known for its significant recycling capacity like India, has been facing foreign exchange problems since October 2022. Despite these challenges, up until August 2023, Bangladesh had recycled more tonnages than India. However, the recent worsening of foreign exchange problems could affect recycling volumes for the rest of 2023.
Pakistan, historically responsible for recycling 15% to 20% of the total scrap tonnage in the Indian subcontinent, began experiencing foreign exchange issues in January 2023. As a result, there have been limited sales to ship recyclers in Pakistan, with only a slow resumption in demand, leading to the sale of a few ships in the third quarter of 2023. The question now is whether this resumption in foreign exchange availability will continue for the remainder of 2023.
Alang ship recycling weekly position as on 10th September 2023
The Russia-Ukraine war, which started in February 2022, had a global impact on energy prices. This was exacerbated by an expected supply shortage in the northern winter of 2022, leading to a substantial increase in energy prices from the second quarter of 2022. Bangladesh and Pakistan were severely affected by these energy price hikes, which caused significant outflows of foreign exchange and fueled inflation in both countries. Their currencies also weakened significantly, with the Bangladesh takka losing 29% against the US dollar in the past year and the Pakistani rupee losing 55% against the US dollar in the past 14 months. So far, government-imposed restrictions on foreign exchange availability for business activities have been manageable from the recycling perspective due to a limited supply of scrap tonnages.
Looking ahead to the fourth quarter of 2023, various stakeholders anticipate increased recycling tonnages due to factors like new ship deliveries and the Container Imbalance Index (CII) impact. However, foreign exchange problems in Bangladesh are intensifying. In recent months, tonnages have been waiting at anchorages for extended periods, awaiting the opening of letter of credit (LC), causing shipowners to become impatient. Some vessels have even been redirected to India for recycling.
Ship recycling : market continues to exhibit a promising trajectory : BEST OASIS
Banks in Bangladesh are demanding high margins of 70% to 110% for opening LCs, putting significant financial strain on ship recyclers. The soaring interest rates also make borrowing prohibitively expensive. With general elections in Bangladesh scheduled for January 2024, it is expected that foreign exchange problems will persist until the end of 2023, and banks may decide to issue fewer LCs or stop issuing them altogether as early as September/October.
In Pakistan, the foreign exchange problem has been severe for a longer period, and inflation has reached 28%. FX availability improved only in August due to loans from international organizations and Pakistan-friendly nations like China, Saudi Arabia, and the UAE. However, the Pakistani rupee has already weakened by 6% since FX became more accessible, and it may continue to weaken. With substantial loan repayments due next year and the economy not yet recovering, Pakistan may not sustain the free availability of foreign exchange for an extended period.
As a result, there is a strong possibility that ship recyclers in Bangladesh and Pakistan, who typically purchase 50% to 65% of South Asian recycling tonnages, may only be able to participate at around 25% to 30% of their usual capacity. This would mean that India would need to handle approximately 80% of the tonnages available for recycling in the Indian subcontinent in the fourth quarter of 2023, creating a buyer’s market.
Assessments of vessels being recycled in Alang, western India, suggest that there would be sufficient capacity in India to accommodate even more tonnages than expected. However, if Indian ship recyclers become selective, prices offered could come under pressure, and there might be caution among buyers as they would be uncertain about future recycling quantities.
For shipowners planning to send their vessels for recycling in the fourth quarter of 2023, it would be advantageous to do so earlier for better price realization and ease of selling. Recyclers would have the opportunity to choose from a range of tonnages at potentially lower prices.
