Ship recyclers stuck with tight vessels, slow steel demand
The ship recycling companies are in a difficult market environment with fewer vessels to break and weaker demand for recycled steel limiting their potential returns. One of the biggest cash buyers of ships for recycling, Wirana Shipping, said strong freight markets are encouraging owners to keep vessels in service rather than sell them for scrap.
The situation comes at a time when demand for steel normally would be expected to pick up. The end of the rainy season usually results in a seasonal rise in construction activity and steel consumption, especially in Pakistan and Bangladesh. This expected recovery has not yet materialized, however, adding to the pressure on recyclers.
Wirana Shipping blames the tough conditions partly on the conflict in the Middle East, which is contributing to higher inflation and more economic uncertainty.
Tightening firm freight rates tighten availability of ships
Strong freight markets are creating a supply-side problem for recycling yards. Shipowners have less incentive to retire ships as they still earn revenue in commercial service. The supply of ships available for recycling is still restricted, which is raising competition among buyers for the tonnage that does reach the market.
Rakesh Khetan, CEO of Wirana Shipping, said the industry would normally expect steel demand in Pakistan and Bangladesh to pick up after the rainy season. The expected bounce back has not materialized yet. The Middle East conflict may impact the sector in two different ways.
On the supply side, strong freight conditions mean ships are at work and the pool of potential recycling candidates is shrinking. On the demand side, local steel consumption is being restrained by inflationary pressures and slower economic activity.
Pricing decisions are complicated by limited supply.
The tight vessel availability and weaker steel markets are creating a particularly difficult balancing act for recyclers. Lower steel prices normally would persuade buyers to reduce their offers for end-of-life ships. But with so few boats on the market, reducing purchase prices isn’t necessarily a simple choice.
Khetan stated that recycling yards need a steady flow of vessels to keep their operations going. However, competition for the limited amount of available tonnage means that ship purchase prices do not always move in line with the underlying steel market conditions.
The result is a market in which recyclers are squeezed on both sides of their business, with enough ships to keep the lights on but weak steel demand and weaker returns. Until the availability of vessels and steel consumption become more balanced, the sector is likely to remain stuck between fierce competition for recyclable tonnage, and an uncertain outlook for its key downstream market.
