The Evolving Financial Architecture of Ship Recycling

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While architecture and shipping may seem unrelated, after careful reflection on the recycling market and its recent trends, one must examine how our industry can sometimes personify ancient superstructures. For the purposes of this article, the reader might consider the differences that exist between a ‘pyramid’ and a ‘shikhara’, which is Sanskrit for “mountain peak” and is a beehive-shaped tower in North Indian architecture.

For many decades, the cash buying industry has been a bit of a black swan in the greater shipping markets and was side-lined by many mainstream players. Stricter environmental standards and a larger appreciation for the impact that Cash Buyers’ have made on the overall market, have begun to positively alter the perception of the ship recycling industry. Over the last few years, the industry has gained much recognition as a prominent pillar of shipping and a force that garners the ability to balance over-built markets through the recycling of billions of dollars worth of obsolete vessels every year. This newfound stature has also attracted the interest of many equity funds and investors, who are looking to cash in on what seems to be a rapidly evolving business that is rooted in the highly sought after emerging subcontinent markets. As such, there has been a flurry of new investors entering the space, many of whom are partnering up with new and old players who find themselves lacking the necessary capital to compete in this fast-paced and cashintensive industry

Although several of the most active Cash buyers today have a history of over speculating with other people’s money, investment firms seem more than willing to open their check books, despite previous bankruptcies and lost millions from previous booms and speculative moves. Ship recycling is not an industry for the faint-hearted. It takes careful study and analysis of markets and futures while finetuning delivery costs and handling the responsible cleaning of tankers, in order to make a profitable and safe deal for all stakeholders – from the seller of the vessel down to the yard worker who is cutting the steel.

Unfortunately, many of the new financiers have failed to understand the correlation between their injection of funds into the market and the instability that has come to dominate the space, which has, in some cases, directly resulted in corners being cut on safety and environmental standards.

While accurate pricing of a ship for recycling is a somewhat complicated process, the economics of the industry are not. When Cash Buyers are financed by an external source of funds that needs to be repaid on high margin revolving lines of credit, the Buyers are simply forced to spend their revolvers in order to turn over the capital, which artificially inflates the market pricing. In turn, this inflation results in tighter margins and often times, losses for those particular buyers. When a Buyer is too small and not financially capable of taking a loss out of his own pocket, the money has to come from somewhere. Often with VLCCs and tankers, this is through pinching pennies on gas freeing – a certainly unsafe practice which eventually puts lives at risk. Sellers of vessels also play an important role because arguing for green recycling clauses to be included in an MOA while simultaneously squeezing the Buyers for the last penny, often leaves small Buyers (who operate with primarily borrowed funds) with no choice except resorting to dangerous cost-saving methods. We have seen containers from and large stock listed Sellers being sold for HKC recycling, only on an ‘as is where is’ basis and ending up on the shores of Bangladesh for example, sold for greater profit margins to non HKC yards by less scrupulous cash buying entities.

Perhaps, the most worrisome aspect of the recent spike in high-cost revolvers coming to the recycling space is the volume of facilities being provided to Buyers who simply do not have the resources to properly carry potential losses. To be clear, the industry has evolved and there is room for sophisticated lending to take place. With this said, it is imperative that funds and financiers are disciplined in their approach and properly vet the Buyers with whom they are funding or else, major problems, the like of which, we have seen in the past in Pakistan and Bangladesh, will once again begin to surface with increased frequency.

At the outset of this article, we asked the reader to consider the difference that exists between a pyramid and a shikhara. At the moment, there are several financiers providing recycling revolvers to the same Cash Buyers who are trying to balance their losses between multiple revolving facilities. In light of these developments in the ship recycling market, we ask the reader to consider that while there are some differences between a pyramid and a shikhara, there are also significant similarities between the two structures and we wonder if perhaps one day in the not so distant future, the term ‘pyramid scheme’ might be overshadowed by the newly minted term ‘shikhara structure!’
Source: GMS



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