Ship Recycling Trends, Developments & Outlook July 23, 2009 Ship Recycling: Trends, Developments & Outlook 1
Ship-Recycling: From 2004 late 2008 Slowest periods in history of ship recycling More than 5-fold increase in demo prices (from USD 150/LT to USD 800/LT Profit taking: Demo ship values exceeded old trading values (ships bought at USD 2 mill were being sold for USD 4 million) Dry bulk vessels disappeared from the market (ships destined for scrap went for trading) Cargoes available for scrap vessels Demo buyers became ship owners Ship recycling capacity shrank 2
Ship-Recycling: What happened after 4 th qtr of 2008 Collapse of ship and scrap steel prices by about 75% Credit Crunch: Local banks withdrew credit lines causing abrupt halt in local Letters of Credit (LCs) Western banks unable to negotiate LCs Relentless supply of ships mainly dry bulk {capers, panamax, handymax (125 in 6months)} More renegotiations than ever before. More lawsuits, auctions, arrests 3
What s being recycled now? Containers Pure Car Carriers Dry Cargo ships LPGs Few tankers Mainly small ships 4
Ship-Recycling Today: Volumes Pre-3 rd quarter 2008: about 300 ships/year 2009-2011: 2011: expected to be record years 900-1,000 000 ships? USD 2 billion annual turnover Location: Indian Subcontinent (Bangladesh, India, Pakistan) Pakistan) will do about 75% of the business (down from about 90%) China has come back strong Turkey: Beneficiary of high Suez transit costs, piracy and low prices in the Indian subcontinent 5
Impact of strong supply on ship-recycling capacity Do we have enough ship recycling capacity in the world to meet the onslaught of high volumes? India: 180; Bangladesh: 40; Pakistan: 30; China and Turkey: 20-25. 25. Is capacity elastic or unelastic? Can we recycle more ships per yard? Can we build more yards in current ship recycling countries? Will capacity emerge from other countries? What if the world runs out of ship recycling capacity? 6
Impact of strong supply on ship prices Owners Loss of asset values by one-third VLCC: USD 30 m to less than USD 10 m Aframax: USD 12 m to < USD 4 M Handy/Handymax: Abt 5.5m to < 2 Where e will prices stabilize? 1998: region USD 135/LT 2009: 200? 150? 50? NEGATIVE?? VOLATILIY: 10-20% Buyers Market 7
Factors affecting PRICES Supply vs Demand Vessel specific Type, where built, LDT Condition/Cargoes/Ownership Spares, Machinery, goodies Local Fundamentals Steel prices and demand Exchange rate Market expectations (supply, budget, etc) Overall capacity and competitive forces 8
Who is a Cash Buyer Within the ship recycling industry, companies such as GMS are known as CASH BUYERS. A Cash Buyer is an entity that purchases a vessel for Cash from a shipowner and re- delivers it to a recycling yard. Cash Buyers are the middlemen in the sale of ships for recycling. Cash Buyers are NOT brokers. Unlike brokers they take TITLE to the ship. About 95% of the deals done via Cash Buyers 9
Example: Disposing a Car 30-years old car for disposal USA price: USD 300 India price: USD 3000 Where do you sell? Why? If India, How? To Whom? Regulations? Guarantees? a Safety of monies? Questions, Questions and More Questions. Cash Buyers find the answers 10
Why do Sellers use a Cash Buyer? Distribution: A ship owner in any part of the world has immediate access to all the potential major ship recycling yards of the world. The ensuing sale negotiations have to be conducted with limited number of buyers (cash) rather than a multitude of ship recycling yards in several different countries ( 1 vs 300) 1. Distribution: 2. Cash vs LC 3. Industry knowledge Country specific (India, Bangladesh, Pakistan, China, Turkey) Ship Recyclers (about 300) Government Regulations 4. Maximization i of Asset Value (31 m) 11
Why do Sellers use a Cash Buyer (cont d) 4. Risk Minimization Price changes, currency fluctuations, sudden legislative items (supreme court India, cartel Bangladesh) 5. Speed of transaction 6. Logistics and Delivery As is vs. Delivered 7. Favorable Jurisdiction 8. Repeat relationship 9. Fair margins (value for money) 12
Why ship-recyclers use Cash Buyers? 1. Wide Inventory to chose from Financing (sight vs. usance LC, acceptance of LC) 2. Financing 3. Ease of delivery (local regulations) 4. Detailed ed understanding d of Buyer needs (type of ships, LDT, Banking, etc.) 5. Local representation 6. Repeat relationship 7. Market Forecasting 13
Road Ahead Safe & Responsible Ship Recycling Worker Safety + Green Ship Recycling Adoption of IMO Convention and implications 14
IMO Convention What is the CONVENTION? Most comprehensive & consequential Key items: Inventory of Hazardous Materials Ship Recycling Plan: Identification, Removal and Safe Disposal of Hazardous Materials Worker Safety at Yards 15
IMO CONVENTION Opportunities and Threats Opportunities Convergence of interests IGOs, NGOs (not all), Owners, Buyers, Ship Recyclers, Class societies Funds & Programs World Bank, ILO, Basel, Owners Assoc Threats Participation (lack of) Government, industry players, Handy owners Misrepresentation & Accountability Beaching Method, GRI Public Relations 16
Myth: Green India? Myth: Bare Hands Fact: PPE 17
Myth Vs. Fact Myth: Half-naked workers! Fact: Fully covered workers in PPC 18
Myth Vs. Fact Myth: Open Fires Fact: 19
Myth Vs. Fact Myth: Unlicensed and uncertified industry! Fact: ISO 9001, 14001 & OHSAS 18001 cert. 20
Ship-Recycling: India Poor Image Renegotiations Worker Rights and environmental concerns Heavily regulated More than 20 licensing bodies 55 ISO 14001/9001 and OHSAS 18001 certified yards (several with all 3) Safety record lowest accident rate of any major industry Economic Benefits 2.5 x salary of mining & construction 21
Why India? Provides good combination of asset value + green ship recycling IMO has acknowledged India s improved standards Blue-chip owners have accepted India s Green credentials India s high prices are because of REUSE and better prices for recyclable items rather than cheap labor 22
REUSE - Better than Recycling Infrastructural growth Ship steel vs. Iron Ore Machinery & Parts Agricultural & Industrial Spare Parts Furniture, fixtures, Oils, Toilets & Toiletries, Lights, Utensils, Silverware, Provisions, etc Defined Re-use Market for every nut and bolt 23
Opportunities Ship Recycling Industry is poised for explosive growth Little competition in Banking and Finance Several revenue points LCs, as is, Ownership Syndicate financing 24
Threats Highly misunderstood Negative Image Hijacking agendas Several sticks, few carrots Lack of industry participation 25
Closing Thought A healthy, vibrant ship recycling industry, Is good for the environment Steel from ship vs Iron Ore Old ships at sea accidents Abandoning For the shipping industry Outlet for safe disposal of old vessels Residual values Creates employment for about 300,000 people Essential for growth of local economies 26
Finally This is the time for all stakeholders to come together. Otherwise, an asset-based industry can soon turn in to a liability. 27