Cash buyers

The German bank KfW IPEX-Bank has become the first German bank to join the Responsible Ship Recycling Standards initiative.

With a lending volume of EUR 13.9 billion ($17 billion) in 2017, KfW IPEX-Bank is one of the top five ship financiers in the world, and, by joining the initiative, highlights that it is setting high standards for the environmental and social compatibility of its financing.

At the end of May 2017, ABN Amro, ING and NIBC established the Responsible Ship Recycling Standards. The initiative now has eight members worldwide, with Nordea, DNB, SEB and Export Credit Norway having joined the three founding banks.

The aim of the initiative is to incorporate scrapping clauses in accordance with international standards including the Hong Kong Convention into loan agreements. These clauses also include an obligation for shipping companies to ensure that all ships carry a Green Passport that provides an overview of all the hazardous materials on board. The aim of the initiative is for shipping companies to observe minimum standards of occupational safety and environmental protection when scrapping their ships and therefore to view scrapping as part of their own value-added chains.

The Banks using their best efforts:
(i) are not directly involved in the financing of unsustainable ship recycling facilities or the purchasers of shipping assets intended for unsustainable ship recycling (such purchasers are sometimes referred to as cash buyers);
(ii) in relation to financing transactions for new ships, agree to only finance ships that carry an Inventory. The Inventory should meet the standards as defined in the E.U. Ship Recycling Regulation;
(iii) in relation to (re)financing transactions for existing ships, require that an Inventory shall be established by the shipowners of such ships. The Inventory shall be established at the next drydocking at the latest;
(iv) will encourage clients to ensure that an Inventory is prepared and maintained for each ship in their existing fleet;
(v) recognize in their due diligence process, the applicable international standards, industry guidelines and their underlying principles to manage the E&S impacts of ship recycling. These standards, guidelines and underlying principles will form the basis for dialogue and engagement with clients on this topic;
(vi) will create awareness on sustainable ship recycling, and address the client’s approach to manage the potential negative impacts of ship recycling;
(vii) expect clients to demonstrate reasonable efforts to act in line with both the letter and the spirit of the standards, industry guidelines and their underlying principles; and
(viii) will promote the standards within the financial sector and encourage other banks to adopt them.

Even though it cannot yet be foreseen just how far the standards will take root throughout the market, Andreas Ufer, Member of the Management Board of KfW IPEX-Bank, is hoping for some tangible effects. “This is an important way to raise awareness about the significance of sustainable ship recycling. We view the Responsible Ship Recycling Standards initiative as a long-term project that will continue to develop and welcome more and more members around the world.”

The news comes as the Pakistani ship recycling market reopens for tankers, ending a near 18 month ban after a deadly explosions occurred at a Gadani yard. Tankers will now have to be totally gas free for hot works and cleaned in a similar manner to procedures used in India and Bangladesh.


Cash buyers

It’s demolition activity which will balance out – eventually – the current tonnage overhang in the tanker market, as it did (coupled with a rise in demand) in the dry bulk market. In its latest weekly report, shipbroker Allied Shipbroking noted that “given that the summer period has now officially come to a close, it seems as though there is some movement being seen now amongst most interested parties, given that we are now approaching the fourth and final quarter of the year. Based on the traditional developments noted in the past, many participants are already betting on a strong closing of the year, especially for the dry bulk sector. Even if it is now well in the past, memories of the collapse in the dry freight market back in 2016 are still very recent for many who were hugely committed in this sector. There is no point to get into too much detail as to the cause, but just to note that the glut in supply that had emerged took a considerable effort and time to deal with properly”.

According to Allied Shipbroking’s Thomas Chasapis, Research Analyst, “given now that tanker market is facing a similar problem of oversupply, derived from both an exaggeration in newbuilding activity of previous years and softer than expected demand, it seems to be a good point to look into the importance of the demolition market as a lever for bringing about a demand/supply rebalancing. Despite its concentrated nature (with just 5 countries accounting for over 90% of overall activity), the ship recycling market is not only vulnerable to the exaggerations and turmoil that take place in the shipping industry as a whole, but also to market aspects which effect each of the main demo destination countries”.

Meanwhile, “while Turkey is already facing a part collapse in its market with its currency at historical lows and China having effectively decided to close its doors to foreign flagged units, we may well say that at this point the exclusive focus is on the Indian Sub-Continent. There, things are also shrouded in uncertainty, given the sluggish pace noted recently. However, given that Pakistan is now ready to fully open its doors once more to all tonnage and should help clear out much of the excess wet tonnage that had piled up, we expect to see a more clear and stable scene emerge in the Indian Sub-Continent as a whole”, said Allied.

The shipbroker added that “the figure that sticks out most right now in terms of market statistics is the total demolition activity for dry bulkers, which has reached a total of just below 50 vessels in the year so far. When comparing this to the previous year which was more than three times higher, you can see how conditions have turned. One could say, that the good freight market has incentivized most shipowners to prolong the trading life of their assets, while others could point out that there is a lack in overage vessels (8.83% of the total dry bulk fleet is more than 20 years old, while just 2.85% is above 25 years). On the other hand, things seemed to be more active on the tanker front, with the total number of units beached already exceeding that of the previous year. Most of this heavy flow was nourished from the larger size segments, with the number of VLCC having more than doubled this year”, Chasapis said.


Future Earnings of Existing Fleet is Still Dependant on Demolition Activity

Sellers and buyers

Ship owners have gone back to the scrapyards over the past couple of weeks, selling more overaged tonnage, in a bid to compensate for the newbuildings entering the global fleet in an already overburdened market. In its latest weekly report, Clarkson Platou Hellas commented that “the market has shown some strong signs of recovery following the reduced buying appetite and lack of tonnage during the summer months with all three Indian Sub-continent markets finally looking evenly balanced creating healthy competition. This has been evidenced by the amount of various types of units that are under the spotlight this week in addition to another high profile VLCC sale, which could possibly prick Owners ears up. With Pakistan now fully operational again in their dismantling process, the larger Tanker units will once again see interesting numbers, as seen below, however the large quantity of bunkers RoB should be well noted, as this is a main contributor to the impressive price”, said the shipbroker.

It added that “however the main concern has been from India where the rupee hit record lows of Rs72 against the US Dollar and has fallen about 6% in the last month and about 10% in the last three months. But the promising news is generally the country economic outlook looks stable with strong GDP growth and local steel markets remaining firm and positive. It is hoped the currency troubles do not deter the ship recyclers from re-discovering there aggressive buying form as we approach the last quarter of the year which is often the strongest time for shipping markets, with more larger wet tonnage anticipated to hit the recycling industry”, Clarkson Platou Hellas concluded.

Meanwhile, in a separate report, Allied Shipbroking noted that it was “another week with limited activity to note in the ship recycling market, with just a handful of units concluded for demolition over the past few days. There is still a feel that appetite amongst breakers is still at limited levels despite the prevailing price levels being noted. The limited flow of demo candidates has played its part in keeping things level, though with expectations now for a re-firming flow of candidates to emerge things could start to get more competitive as we move forward. There are however other important factors feeding this clampdown of late. First of all, dry bulk sector is almost absent in the year so far in terms of activity, a sector which has played a big part in feeding volume over the past couple of years. Given the prevailing state of earnings and this trend is likely to hold in the short run at least. As such things have largely depended on the tanker sector, which has already hit a 5-year high in terms of number of vessels sent to be scrapped”.

In its latest report, GMS, the world’s leading cash buyer said that “markets are precariously poised at present, with the depreciating Indian Rupee & volatile local steel plate prices bringing grave concern to Alang Buyers, while news of a ‘mini’ budget with a potentially negative outcome for Gadani’s ship recycling sector has started filtering through from Pakistan. Moreover, both Bangladesh and Pakistan (since Gadani reopened for Tankers towards the end of April) remain stuffed with several large LDT Aframax / Suezmax / VLCCs that have been beached here over the last several months and this has led to a muted degree of demand from these markets over the monsoon season. Cutting permissions too have only recently been issued for the first batch of tankers delivered in Pakistan, while all of the wet units delivered here have sat idly on local yards ever since, waiting for re-inspections and the issuance of gas free certificates from the relevant departments. It is therefore expected to take a few months before some of that inventory starts to shift from local yards and demand returns to previous levels, despite a minimal number of arrivals and beachings through August and an empty port report in Gadani for the third running week.

With the Indian Rupee trading over Rs. 72 against the U.S. Dollar (in unprecedented and historical lows), it has been a curiously tentative week with many end Buyers not expecting market improvements to the same extent that some bullish Cash Buyers are pricing some of their offers / acquisitions that resulted in another VLCC and a Capesize bulker being fixed at some extremely speculative numbers this week. At the far ends and as has been the case for several weeks, now, Turkey and (especially) China remain non-players in the recycling industry”, GMS concluded.


Demolition Activity Returns to Growth Mode