India Steel Market Watch
November 16: Indian ship-breakers are facing an uncertain future as scrap prices decline and the rupee value against the dollar nosedive, industry sources said.
With domestic steel demand at all-time low, scrap steel realisations declined by over 20%. Scrap steel is a major output of ship-breakers and a key raw material in secondary steel-making.
Scrap prices declined by about Rs 5,000-6,000 per ton from Rs 26,000 per ton to Rs 20,000 in the last one year, said credit rating agency CRISIL in a note.
“The price of scrap steel, which was declining between 2 and 4% on a monthly basis, plunged nearly 20% after China moved to de-facto devaluation of the yuan in August 2015,” the CRISIL note said.
While a ship is dismantled over six months or so, sale of scrap takes place every month. However, given the sharp decline in the price of scrap steel since August, the industry, is estimated to have taken a knock of Rs 120 crore.
Around 9% depreciation in the rupee against the dollar in the 12 months has added to the woes. The industry is already reeling under Rs 1,200 crore of cumulative foreign exchange losses in the last three fiscals.
Ship-breakers buy condemned vessels based on letter of credit in foreign currency, which typically has a maturity period of six months. Indian ship-breakers, however, do not hedge foreign currency exposure, as the hedging cost is perceived to have an additional depressing impact on their operating margin by 4-5%.
All these have reduced the average number of ships dismantled at Alang in Gujarat. To shorten their operating cycle further and to contain the impact of volatile currency and steel prices, ship-breakers have been buying smaller vessels. The forex and inventory losses would have been staggering had ship-breaking activity continued at the pace seen in 2013, sources said.
If steel prices do not rise and the rupee remains volatile, the situation for ship-breakers would be difficult, sources said.