Weak scrap demand hits China's ship recycling business

The room for profit in China's ship recycling industry is likely to be squeezed by weak domestic scrap demand and the high cost of its "green" vessel-breaking methods this year, even though the government has offered favorable policies to encourage more vessels to be dismantled by 2015.

Ship recycling is an industry that supplies raw materials for infrastructure and capital projects in a number of sectors such as hydropower, bridge and railway construction works, particularly in developing countries. Ship recycling yards need to buy scrap ships from ship owners first before starting their business.

Wu Jun, vice-secretary-general of the Beijing-based China National Shiprecycling Association, said because China is taking action to scale down infrastructure and real estate investment while using restrictive measures to cut production capacity in its steel plants, the country currently doesn't need a large amount of scrap as a source of steel at the moment.

"Therefore, it won't be easy for Chinese ship-breaking yards to sell scrap even at a bargain price to the market this year," Wu said. "The previous high prices of both foreign and domestic scrap ships were another element that cut the profit margin of Chinese companies. Many of them have already reported financial losses for last year."

As a major global ship recycler, China dismantled 2.5 million tons of scrap vessels in 2013, up 4.6 percent from the previous year, according to the China National Shiprecycling Association.

The scrap price was traded between 2,450 and 2,650 yuan ($404 and $437) a metric ton in China in the first half of last year. But the price dropped to 2,300 yuan a metric ton in January, data from the China Association of the National Shipbuilding Industry shows.

China's ship recycling yards are mainly located in Zhejiang, Jiangsu, Shandong and Guangdong provinces. There are around 110,000 people working in the sector.

Because of cheap scrap prices, Wu said many ship-breaking yard owners would rather keep their scrap in storehouses, instead of selling it cheaply to steel plants.

To help China's shipping companies reduce the pressure caused by overcapacity over the past four years, the Chinese government issued a new subsidy policy to encourage the nation's shipping companies to reduce the number of aging vessels and replace them with technically advanced vessels last December.

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