Weak Rupee, Economic Slowdown Hit India’s Ship Recyclers who pay in U.S. dollars for the ships they buy to break down. They often take bank credit, to be repaid in three to nine months. Most in this low-margin business don’t hedge

September 13, 2013, 4:45 a.m. ET

Weak Rupee, Economic Slowdown Hit India’s Ship Recyclers

Local Currency’s Steep Fall Drives Up Cost, Weak Economy Hurts Demand

BIMAN MUKHERJI

NEW DELHI—The world’s largest ship-breaking yard at Alang on India’s western shore is hit by a double whammy. The rupee currency’s deep dive has driven up their cost, while a slowdown in the local economy has sapped demand for scrap steel. “About 90% of the industry is in trouble because of the rupee’s slide,” said Nitin Kanakia, joint secretary of the Ship Recycling Industries Association of India.That is because ship recyclers pay in U.S. dollars for the ships they buy to break down. They often take bank credit, to be repaid in three to nine months. Most in this low-margin business don’t hedge against the risk of foreign-exchange volatility because of the added cost, but that is now hurting them as repaying foreign-currency credit costs more because of the rupee’s weakness.

The local currency has lost about 16% of its value against the dollar since the start of May. The rupee was down as much as 22% in late August, when hit a record low against the dollar.

The recyclers are unable to pass on the higher cost to buyers of scrap metal, such as steel rolling mills, as they too are facing a demand slowdown.

India’s economy expanded 4.4% during April to June, its weakest pace since the first quarter of 2009. Many economists expect economic growth in the fiscal year through March to be equal to or less than last year’s decade-low pace of 5%. The weak economy has hurt demand for steel from sectors such as automobile and construction.

The low-cost, ship-scrapping industry at Alang town of Gujarat state is a multibillion-dollar business, employing tens of thousands of workers. As many as 394 ships arrived at its shores for breaking down in the financial year ended March 2013.

Arrival of ships has dropped by almost half of the monthly average since to 17 in August, said Mr. Kanakia of the Ship Recycling Industries Association.

This has affected jobs, though the impact is “minimal right now,” said Mr. Kanakia. “If this situation continues and yards close down, then it would certainly have a big impact on employment.”

According to Mr. Kanakia, companies in the Alang ship yard employ about 30,000 workers. Another about 500,000 people are employed in shops selling secondhand goods and by scrap-metal processors, he said.

Ship breakers sell contents such as furniture and dinnerware from the ships they break down, but most of their revenue comes from recycling steel that typically comprises about 85% of the weight of a ship.

“The demand for finished steel is not growing at all,” said Chintan Kalthia, owner of Kalthia Ship Breaking Yard. “But our costs have gone up because the rupee has lost value.”

Scrap steel from recycled ships now sells for about 23,800 rupees ($373) a metric ton, around the same level as three months ago.

The price of old ships has fallen by 8%-10% since early June—to around $370 a ton—but that isn’t enough to offset the impact of the weaker rupee.

The weak rupee has hampered the ability of Indian ship recyclers to bid for ships and they are now losing out to rivals in Pakistan and Bangladesh, Mr. Kalthia said.

Ship breakers in those two countries are mostly unaffected by currency fluctuations. The Bangladeshi taka is around the same level against the dollar now compared with early May, while the Pakistani rupee has depreciated by about 5%.

However, a top official of the Bangladesh ship-breaking industry said companies there had not benefited from the loss of business in India.

“The demand for the steel plates from ships has gone down. There are just no takers,” said Hefazur Rehman, president of the Bangladesh Ship Breakers Association.

He said the price of the steel plates had fallen by 8,000-9,000 Bangladeshi takas ($102-$115) in the past three months to around 31,000-32,000 takas a ton.

“Our business is quite bad. People are suffering losses,” said Mr. Rahman, saying that the Bangladesh economy was also suffering with the country gearing up for elections, to be held early next year.

But business conditions are far worse at Alang in India.

“There is no viability in the business, so everything has stopped in the last two months. We can’t purchase new ships,” said Vikas J. Patel, managing director of Appolo Vikas Steels Ltd.

Mr. Patel’s company owns two plots at Alang’s ship yard, each employing about 150 contract workers.