Growing importance of Cash Buyers and Recycling
More and more players in the shipping industry are coming to rely on cash buyers/Recycling
The ship’s last journey to its grave - in most cases a matter of no consequence – could change the traditional way ship financing takes place. Cash buyers and ship recycling are beginning to have greater impact on ship building, sale & purchase and also shipping in general. Often it is the small players who turn to cash buyers for their assistance. Hence, the important role played by ship recyclers and cash buyers in shipping cannot be ignored.
After the boom of 2008 a lot of development has been taking place causing investment banks and ship builders beginning to rely more and more on the judgment and opinion of cash buyers. Dr. Anil Sharma, President and CEO of GMS, which claims to have negotiated about 2,000 ships for recycling so far says, “As a result of our activity there is a great impact on new building shipyards and other shipping trade. In reality, I have been often called up by Chinese shipyard wanting to know what the value of various vessels will be in the next five, ten and 20 years. Many ship owners who have suffered in the downturn and in the midst of carrying out deals want to know the value of their assets and how their value is likely to change with time. There is an impact on charterers. The faster we can recycle ships and the faster we do it the more is the impact on chartering. Both ship recyclers and cash buyers are in relationship with the charterers. Sale and purchase also has a bearing. Recently, the moment the prices of ships to be recycled went up the second hand prices went up by 10% in a matter of two to three weeks. Ship financers are very comfortable financing a ship based on our recommendation. They need to know the bottom price and how it will move. Recently, the Shipping Corporation of India wanted to sell a vessel and wanted to know from us how much it could be traded for.”
Where do cash buyers come in? Cash buyers are not brokers, nor are they traders. They have the role of a principal. Shashank Agrawal, Group Legal Advisor to Wirana Shipping Corporation which is based in Singapore says, “Companies such as WIRANA within the ship recycling industry are known as cash buyers since they purchase, from the owners, the vessel, basis 100 percent cash. In turn the cash buyer would sell the vessel to a ship recycler in any one of the ship recycling countries. For vessels purchased basis “as is” the cash buyer takes over the vessel at the delivery port and then boards his own crew for the sailing of the vessel. In the meantime the vessel is re-flagged, given a brand new name and is provided a fresh set of insurance cover for the voyage to the recycling yards.”
He goes on to explain that they are referred to as underwriters of recycling market risks. Due to fluctuations in steel prices in an extremely volatile market the owners / sellers could stand to lose millions of dollars by the time the vessel arrives at the delivery port. “Irrespective of market conditions principals of WIRANA have stood by the owners and sellers like the ROCK and have underwritten as part of their regular market practice,” he avers.
WIRANA upon delivery of the vessel in the Indian Subcontinent accepts Letter of Credit (LC) as the mode of payment from their end ship recyclers something which the original owner may be unwilling to accept or perhaps may have little experience in negotiating and therefore owner prefers to work with cash buyers. At an estimate at least 98 percent of vessels for recycling are sold via cash buyers. Therefore, at all times the owners remain completely secure as their final payment from WIRANA for the vessel is not contingent upon receiving funds from the end ship recyclers which clearly demonstrate that WIRANA act as the cushion between the owners and the end buyers of the vessel.
The gap between perception and reality is perhaps the widest in the ship recycling industry than any other industry in the modern world. More than 8,000 vessels have been scrapped at Alang, on the West coast of India since 1983 thus generating steel output in excess of 90 million tons. In an average year Alang recycles about 600 vessels with annual sales turnover from this activity of about of about USD 1.6 billion.