Why are Billions of Dollars Worth of Ships Being Intentionally Destroyed?

this is the carnival imagination a luxury cruise liner worth hundreds of millions of dollars which just 10 short months ago was touring passengers in extreme comfort to exotic destinations all over the world this ship is sailing dead ahead to its final port of call where it will be sold for scrap alongside dozens of other ships that have become the latest victims of the global pandemic the chittagong breaking yard in bangladesh is the largest of its kind in the world and in the last few months even its abundant shores have become inundated with pleasure cruisers and industrial cargo ships alike that all could have otherwise sailed the oceans for many more decades these are all very troubling signs to the unsung heroes of our modern global economy the merchant marine fleet every year trillions of dollars worth of cargo is transported on ships like these and losing this fleet could turn into a huge barrier for global trade but what is really going on here why would profit motivated companies destroy billions of dollars worth of productive assets sure times are tough tourism and trade have declined massively but this hardly looks like a reasonable response right i don't burn down my house if a video gets less than 10 000 likes so why would companies in such a competitive industry do something equally as self-destructive well as always it has to do with economics go figure and to understand this bizarre behaviour we need to understand a few key areas what are the economics behind the merchant marine fleet how do these factors make it financially viable to destroy ships like this what does this mean for the future of international trade and what does this all have to do with chinese bridge building this episode of economics explained was made possible by our fans on patreon if you would like to gain early access to these videos before they're uploaded to youtube as well as participate in exclusive q a sessions which are now held every saturday at 9 30 eastern standard time please consider supporting our channel at patreon.com economics explained now most ships have a service life of around 40 years at the end of the day they are a depreciating asset like a car truck or a piece of industrial equipment after a certain point they cost more to maintain than they bring in in profit what's more is that all the ships are naturally less efficient they burn more fuel and require larger crews with the average crew member costing about 75 000 per year this is a major consideration this whole industry runs on razor thin margins and the difference between a crew of 10 and a crew of 30 could be the difference between a profitable journey or a journey that ended up costing money this type of numbers game extends to other areas as well an increasingly common trend among shipping companies is something called slow steaming which is sailing the ships far slower than they are capable of in order to save on fuel costs the trade-off is of course that items get delivered days later than they would have otherwise but shipping companies have determined that a net reduction in speed offsets the cost of requiring slightly slower global supply chains this also suits major shipping companies because of their push to operate larger and larger vessels a large industry standard vessel is usually around 275 metres long and in fact this is an extremely popular size because it is the longest ship that can make it through the panama canal in fact they even have a class designation these ships are known as panamax's go figure how they came up with that one now these kinds of ships can normally carry around 100 000 tons of cargo or raw materials which sounds very impressive but compare that with the larger ships roaming the ocean the veil max class of bolt carriers which are you know well only forty percent longer than these panama crosses are 360 meters in length these ships have a capacity of 380 000 tonnes meaning they have four times the cargo of their smaller panama crossing piers this is thanks to the square cube law basically shipping companies only care about how much stuff they can fit into their ships the cargo that's what they make money on these ships themselves are basically just containers to be filled now if we make a container twice as long twice as thick and twice as high you might think great you can fit twice as much stuff in it but in reality you can actually fit eight times as much stuff in it while only using four times as much material to build that container this is one of the key benefits of shipping over all other mediums of transport ships can get really big now out of fear of sounding like a wendover productions video this meticulous obsession over numbers and scale is what makes the merchant navy the pack mule of globalization there have been a few times on this channel where we have commented on nations being landlocked and we've always noted that as a massive disadvantage the reason we gave is that it cut them off from international trade via shipping and we kind of left it at that now the comments rightfully pointed out that there are plenty of other ways to move stuff around trains planes trucks carrier pigeons and none of these alternatives require an ocean or port infrastructure and that's perfectly fair but none of these alternatives are nearly as cheap as using a ship for all of the reasons we saw above trains are the efficiency runners-up because their steel on steel locomotion offers very little friction so once they get going they keep on going but they still lose out to cargo ships and require much more infrastructure to facilitate this also becomes much more difficult to implement if this train line needs to span across multiple nations that may or may not be benefiting from this global trade the benefits of shipping show some really incredible results that you may not expect if you wanted to get just one standard 40-foot shipping container from the united kingdom to australia you would pay a retail shipping rate of around 2 200 pounds which sounds expensive but these containers are very large on the other hand if you wanted to ship that same container from the uk to switzerland it would cost 3 100 pounds this is despite switzerland being 20 times closer a ship can sail straight from the uk to sydney or work across popular shipping routes the container destined for switzerland would either have to fly or be transported on the back of a truck of course these are retail rates and major exporters would have deals in place with shipping companies but the margins are actually likely to be wider in these wholesale deals rather than this one-off example of a single shipping container now this has implications beyond just moving houses it can determine the economy of nations if a landlocked country wanted to compete on price for manufactured goods it would not only need to produce items cheaper than their competitors they would need to produce items cheaper than their competitors after the expenses of trucking components in and finished products out are considered what this means is that low-cost manufacturing is just not really an option for these countries which is a major bummer because low-cost manufacturing has been the driver of nations to make the leap from underdeveloped to developed bringing millions of their residents out of poverty all across the world in recent decades of course for nations like switzerland it doesn't really matter because most of their economy is based around advanced financial services which don't need to be loaded into shipping containers and what few products they do manufacture are so valuable that shipping costs are an irrelevant rounding error but for a country like mongolia this is just an unfortunate reality however this status quo has been majorly challenged by the fallout of the corona virus international trade has fallen drastically as nations move to close borders and consumer demand dries up across the world there have also been major hits to companies that operate a fleet of both cargo and passenger ships because absolutely nobody is going on a cruise these days this sunk demand has meant fewer containers have been moved which requires a fleet of fewer and smaller ships to move remember smaller ships are far from ideal for shipping companies now one reprieve has been that oil costs during this period have been extraordinarily low this has been a major win for shipping companies for two reasons for starters it is offset a good portion of the cost of running smaller less efficient vessels with smaller cargo loads but it has also provided a very odd revenue source you might remember that earlier this year oil prices went into the negatives we made a video on this weird phenomenon but the breakdown was basically that the world had too much oil and nowhere to keep it before an arbitrary due date determined by derivatives that drive the oil market or even more basically the world needed somewhere to keep its oil and well oil tankers are great at that cunning speculators actually ordered space on these tankers got paid to take on oil sailed the ships around in circles for a month and then sold the oil back to the market that paid them to have it in the first place this was obviously a very profitable albeit risky strategy for the commodity speculator but it was a lovely risk-free payday for the shipping companies they got paid to effectively do what they were going to do anyway with their ships which was pretty much nothing now this little win was great and all but it was short-lived oil prices stabilized at more reasonable levels and the demand for ships did not do the same this has all led to companies starting to make some tough decisions during times of economic uncertainty responsible governments will roll out fiscal stimulus that aims to fill the shortfall of consumer spending with government spending the hope of these projects is that they can maintain employment incomes and quality of life during times of economic turbulence these stimulus bills can also achieve some nice healthy side effects for example the usa used this stimulus to prop up corporations that might be useful to them once the economy recovers australia used its fiscal spending to keep on propping up a housing market that definitely won't end badly and there are similar stories of most developed nations all over the world however amidst the headlines of trillion dollar bailouts and quantitative easing concerns people have overlooked that china is doing something very similar albeit with a little bit more forward planning the chinese government is spending hundreds of billions of dollars on stimulus just the same as everyone else but that stimulus is coming in the form of infrastructure spending which is a quick side note is a real big brain move infrastructure stimulus is just fantastic it employs people like laborers engineers tradesmen in the short term it gets money out to local suppliers all while having the benefit of actually producing a bridge or a railroad or a shipping port which will continue to provide industrial capacity into the future okay but despite being a very clever piece of policy spending on all of these lovely infrastructure projects requires a lot of materials specifically iron the demand for china to facilitate these infrastructure developments has been so strong that it's increased the price of iron by over 300 percent from where it was five years ago this spike in iron oil prices has been accelerated by reduced supply from nations like australia which have been battling with state to state lockdowns which means that a lot of their miners can't actually get to work now this is all well and good commodity prices go bro but what does that have to do with ships well ships are made of steel and the money that shipping companies will receive for scrapping their ships is at the highest point it has been in almost a decade so these companies have a choice hold out and continue to pay millions of dollars a year in crew costs insurance docking fees maintenance and fuel for ships that may or may not go back to work in full capacity within the next few years or scrap them for a payday right now unfortunately for all the reasons listed above the market for second-hand ships is weaker than the market for scrap metals so it's starting to look like a pretty compelling option and one that more and more companies will need to exercise what they are doing is thinning out their fleet starting with the older ships first in the hopes that it will lower their overheads while giving them an injection of cash that they can use to ride out the global pandemic or maybe even used to invest into the next generation of more efficient ships it is obviously a gamble if the world went back to normal tomorrow it would be a terrible move to sell a perfectly operational ship for the price of its scrap metal but unfortunately for many companies it's becoming a decision that is getting made for them but with less and less ships around to carry the weight what does this mean for the future of global trade a smaller merchant marine fleet may very well be an accelerating factor in the push for nations to become more and more self-sufficient if 2020 has shown anything as if things go wrong it's every man for themselves for better or for worse now the trade-off to this self-sufficiency will be that global trade allows countries to leverage their comparative advantage that advantage could be oil production in the uae luxury cars in germany or low-cost manufacturing in china if any of these countries were forced to dabble in the industries of their peers they would either do a very terrible job of it or produce goods that are prohibitively expensive global trade has allowed nations to focus on what they are good at at the expense of being a little bit less self-sufficient over time the shift from self-sufficiency to cooperation has always been a positive one i mean imagine if you had to produce everything you ever needed by yourself but will the process be slowed or even reversed by these factors well yeah probably it looks like that's the way the big money is betting but it really is just too hard to tell for now if nothing else the wrecking of ships is a great case study into how nothing in the global economy happens in isolation lost demand in the united states means fewer cargo containers from japan which is making greek ships useless outside of providing raw materials to china for infrastructure projects that are trying to prop up the same demand shortfall that caused this whole issue in the first place hi guys i hope you enjoyed the latest video if you did please consider liking and subscribing this video is made possible by our patrons over on patreon so if you enjoy this video please consider supporting the channel like these awesome people did thanks guys bye

Channel: Economics Explained

Views: 2,805,400

Rating: 4.8804412 out of 5

Keywords: the death of the merchant marine, merchant ships, why are merchant ships being destroyed, the economics of merchant ships, why are trade ships being destroyed, international trade ships, the economics behind the merchant marine fleet, the economics of chinese bridge building, why does it make sense to destroy ships, the economics of destroying ships, the economics of destroying merchant marine fleets, the economics of merchant marine fleets, economics explained

Id: qo-2gDg-37w

Length: 13min 45sec (825 seconds)

Published: Thu Dec 03 2020

Reddit Comments

[u/epicpeople84_]

Wow, I never would of thought that shipping stuff to Australia would be cheaper than our European neighbours. Why don't more politicians/businesses mention this?

[u/NorthcoteTrevelyan]

Wow lovely explanation. Nice channel!

[u/UnderpantGuru]

That's great obviously, but how much time does it take to ship from the UK to Australia and what are the incremental environmental impacts?

Timing is important for many complicated manufacturing, it's why the UK government negotiating fishing as more important than aeronautical or vehicle manufacturing is mind boggling to me.

[u/purexfebreeze]

Great channel been watching since the beginning

[u/deploy_at_night]

One problem I can see is that it can be harder to run JIT supply lines in this fashion.