Alang-Gujarat’s ship recycling industry eyes 10% CAGR by CY28

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Alang-Gujarat’s ship recycling industry eyes 10% CAGR by CY28

Alang-Gujarat’s ship recycling industry eyes 10% CAGR by CY28

Industry News
Oct 10,24

As newer, more efficient vessels are introduced, older ships become increasingly unviable for operation.

Alang-Gujarat’s ship recycling industry eyes 10% CAGR by CY28

India's ship-recycling industry is a crucial part of the global maritime sector. The top four countries including Bangladesh, India, Pakistan, and Turkey dominate the ship-recycling industry, dismantling over 90% of the global ship recycling volume. India and Bangladesh consistently led the industry, while contributions from other countries were variable and generally lower.

From CY17 to CY23, the ship-recycling industry saw a decline in the number of ships recycled, with significant activity in CY21. The number of ships dismantled in CY22 and CY23 declined to 443 ships and 444 ships, respectively with above 600 ships in previous years. In terms of volume (GT) in CY22 and CY23, globally 7.17 and 7.47 million GT were dismantled as compared to 12 to 23 million GT in preceding five CYs. India’s share in the global recycling industry remained 27% in the past, before increasing to 33% in CY22 and CY23, reflecting a rise in its contribution amidst global declines. In terms of volume, in CY22 and CY23, India dismantled 2.26 and 2.47 million GT, respectively.

Factors influencing ship recycling activity

India's ship-recycling industry is influenced by several factors including global ship recycling trends, balance between addition of shipping capacity and ship-recycling activity, fluctuations in Baltic Dry Index (BDI) and trends in Bhavnagar heavy melting scrap prices. Understanding these elements is essential for predicting future direction of ship-recycling industry.

Shipping capacity addition and ship-recycling activity

Decline in global ship-recycling activities combined with stable addition in shipping capacity in recent years highlights growing number of obsolete vessels still in operation. As newer, more efficient vessels are introduced, older ships become increasingly unviable for operation. This trend creates a rising need for ship recycling, as operators seek to retire aging vessels that are no longer economically feasible to maintain. The reason for the increasing proportion of ageing vessels in operational fleet includes post-pandemic higher freight prices (indicated by BDI) and volatility in heavy melting scrap prices with downward trajectory in the past two years.

Also, per the data from the United Nations Conference on Trade and Development (UNCTAD), at the start of 2023, average age of global shipping fleet was 22.2 years (increased from 20.5 years in 2018) in terms of total ships. However, in terms of dead weight tonnage, average age remains at 12 years (increased from 10.1 years in 2018). Typical average lifespan of a ship is 25 years, which indicates that a significant number of vessels of lower average weight are nearing the end of their operational lives, leading to a higher likelihood of these older ships being retired and recycled soon.

Baltic Dry Index

BDI serves as a crucial indicator of the global shipping market's health and directly impacts the ship-recycling industry. In 2021, BDI surged, peaking at $4,820 in October, driven by severe supply chain disruptions and increased shipping demand. However, as pandemic-induced disruptions subsided, BDI declined. Supply chains normalised, and an influx of new vessels expanded market capacity, leading to decreased freight rates. Index has since shown a fluctuating pattern but remains significantly lower than its October 2021 peak. For instance, after making a low below $700 in February 2023 it again increased to around $1,983 in July 2024, relatively higher to its 10 years average mainly due to red sea crisis. This indicates intermittent turbulences still exist due to geo political reasons. Decline in BDI towards historical level could trigger increased retirement of ageing vessels boosting ship recycling activities.

Bhavnagar heavy melting scrap prices

Another critical factor is the trend in Bhavnagar heavy melting scrap prices, significantly impacting the economics of ship recycling. Prices for heavy melting scrap in Bhavnagar surged from Rs 28,800 per tonne in August 2020 to a peak of Rs 54,400 per tonne in April 2022, driven by supply chain disruptions and heightened demand for steel amid post-pandemic economic recovery efforts.

However, after peaking, scrap prices began to decline, settling at Rs 39,900 per tonne in December 2023. Since January 2023, prices have stabilised between Rs 36,000 per tonne and Rs 44,000 per tonne. This recent stabilisation suggests that the market has adjusted to post-pandemic conditions, providing a more predictable cost structure for industries reliant on scrap metal. For ship-recyclers, stable scrap prices mitigate profitability risks and enable more reliable ship procurement planning.

CareEdge view

Despite a decline in ship recycling industry, 45 CARE-rated entities remained resilient marked by modified credit ratio of 0.97x due to reaffirmation of most entities. Entities maintained stable turnover driven by increase in trading activities and selective purchase of ships, which offset the reduced scrap volumes. Entities are supported by favourable financial structure owing to low debt levels in lower ship recycling activities, low fixed overheads and contract-based employees in the operations.

“The Indian ship recycling industry is expected to witness similar recycling level in CY24 with an estimate of 2.3 to 2.6 million GT, thereafter a jump to over 3.8 to 4.2 million GT in CY25. The ship recycling industry in India is expected to grow at compound annual growth rate (CAGR) of 10% in CY26-CY28. Cooling-off of BDI, stabilisation of heavy melting scrap prices, and increase in obsolete ships in operations, suggest more ships to enter the recycling market from CY25 onwards. Countries having better infrastructure and green recycling facilities are expected to attract a larger portion of ships in future,” says Sajni Shah, Assistant Director, and CareEdge Ratings.