Tradewinds – Grieg Green profits to turn the corner as contracts fall into place

(Written by Bob Rust)

24 April 2013 - China scrapping specialist Grieg Green expects positive financial results this year with an increasing volume of tonnage

Shiprecycling specialist Grieg Green expects to turn the corner into black figures this year despite uncompetitive Chinese prices for demolition ships.

The shiprecycling subsidiary of Grieg Star Shipping, which began operations in 2011, hopes to acquire and scrap up to 12 vessels this year and had already contracted five through April.

Clients include Hoegh, Gearbulk, Sinokor and Grieg itself, but nearly all of its business is from outside owners rather than the Bergen-based parent.

“Grieg ships are not necessarily scrapped through us, but so far they have not scrapped any without us,” Grieg Green chief executive Petter Heier told TradeWinds.

Heier thinks his operation, which has lean overheads consisting of salaries and office space and no per-project costs, could probably break even on about seven ships a year but the target needs to be higher to earn back the start-up investment.

Grieg Green says it has access to financing and approved yards that would in theory allow it to buy 300 ships a year. At present, most ships are sourced through brokers but Heier and his colleagues also market directly to European and Asian owners.

Despite the constant commercial struggle, some shipowners have been persuaded that it is worth leaving $50 to $70 per tonne on the table for the sake of environmentally sustainable scrapping.

“The challenging part for us is the price difference between the subcontinent and China,” Heier said.

“At a time when most shipowners are in a financially stressed situation, it’s not easy for them to keep their green profile and lose more money.”

Today’s price gap makes it profitable to scrap in India even if a ship’s final voyage leaves it positioned in China.

In its scrapping deals, Grieg Green operates as a cash buyer but also collects a fee for its scrapping supervision services. It makes all its money from the fee, not as a cash buyer, since the purchase from the owner and the resale to the recycling yard are done on back-to-back terms.

“We are just the owners of the vessel for five minutes,” said Heier, who explains that the transfer of ownership is important for shipowners who are disposing of vessels because it saves them from any legal exposure to the scrapping yards.

Since Grieg Green takes on the transaction risk by buying and reselling the scrap tonnage, it has responsibility for making sure the deal will work technically, environmentally and also financially.

The auditing is done principally by Shanghai-based technical manager Gao Wenyan (Allan Gao) of the Shanghai office.

Together with Oslo-based Heier, Gao inspects and audits both established and startup scrapping facilities, and also the downstream facilities where scrapping yards send waste for disposal, as well as doing due diligence.

“Allan has to make sure the yards are financially strong enough to buy the vessels on their own,” said Heier.

“The main reason European owners are going to Grieg Green is that they want the security of dealing with a partner they know about. They have recourse if there’s a problem — they can bring Grieg to court instead of a Chinese shipyard,” he said. “But we also give security to the Chinese side because we check the shipowner as well.”

Grieg Green currently has agreements in place to work with six or seven scrapping yards in three regions that it has vetted. So far, however, it has sent all its ships to the Jiangmen Zhongxin Shipbreaking & Steel Co yard in southern China, which can take up to 500,000 ldt of scrap throughput per year. That works out at 40 to 50 ships.

For the future, the company is also auditing yards in Turkey and Lithuania, besides the newly opened Chinese facilities that are coming onstream each year.

“We want to be wherever things happen, whether that’s in Europe, the Philippines, South America or China,” Heier said.