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Why are Billions of Dollars Worth of Ships Being Intentionally Destroyed? | Economics Explained - YouTube
Channel: Economics Explained
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this is the carnival imagination a
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luxury cruise liner worth hundreds of
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millions of dollars which just 10 short
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months ago was touring passengers in
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extreme comfort to exotic destinations
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all over the world
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this ship is sailing dead ahead to its
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final port of call where it will be sold
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for scrap
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alongside dozens of other ships that
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have become the latest victims of the
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global pandemic
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the chittagong breaking yard in
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bangladesh is the largest of its kind in
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the world and in the last few months
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even its abundant shores have become
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inundated with pleasure cruisers and
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industrial cargo ships alike
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that all could have otherwise sailed the
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oceans for many more decades
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these are all very troubling signs to
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the unsung heroes of our modern global
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economy
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the merchant marine fleet every year
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trillions of dollars worth of cargo is
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transported on ships like
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these and losing this fleet could turn
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into a huge barrier for global trade
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but what is really going on here why
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would profit motivated companies destroy
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billions of dollars worth of productive
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assets sure times are tough tourism and
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trade have declined massively
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but this hardly looks like a reasonable
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response right i don't burn down my
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house if a video gets less than 10 000
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likes so why would companies in such a
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competitive industry do something
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equally as self-destructive
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well as always it has to do with
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economics go figure
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and to understand this bizarre behaviour
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we need to understand a few
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key areas what are the economics behind
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the merchant marine fleet
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how do these factors make it financially
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viable to destroy ships like this
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what does this mean for the future of
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international trade and
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what does this all have to do with
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chinese bridge building
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this episode of economics explained was
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economics explained now most ships have
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a service life
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of around 40 years at the end of the day
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they are a depreciating asset like a car
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truck or a piece of industrial equipment
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after a certain point they cost more to
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maintain than they bring in
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in profit what's more is that all the
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ships are naturally less efficient they
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burn more fuel and require larger crews
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with the average crew member costing
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about 75
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000 per year this is a major
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consideration
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this whole industry runs on razor thin
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margins and the difference between a
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crew of 10 and a crew of 30
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could be the difference between a
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profitable journey or a journey that
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ended up costing money
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this type of numbers game extends to
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other areas as well
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an increasingly common trend among
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shipping companies is something called
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slow
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steaming which is sailing the ships far
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slower than they are capable of
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in order to save on fuel costs the
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trade-off is of course that items get
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delivered days later than they would
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have otherwise
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but shipping companies have determined
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that a net reduction in speed
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offsets the cost of requiring slightly
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slower global supply chains this also
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suits major shipping companies because
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of their push to operate larger and
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larger vessels
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a large industry standard vessel is
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usually around 275 metres long
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and in fact this is an extremely popular
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size because it is the longest ship that
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can make it through the panama canal
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in fact they even have a class
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designation these ships are known as
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panamax's
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go figure how they came up with that one
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now these kinds of ships can normally
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carry around
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100 000 tons of cargo or raw materials
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which sounds very impressive but compare
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that with the larger ships roaming the
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ocean
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the veil max class of bolt carriers
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which are you know well
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only forty percent longer than these
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panama crosses are 360 meters in length
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these ships have a capacity of 380
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000 tonnes meaning they have four times
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the cargo of their smaller panama
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crossing piers
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this is thanks to the square cube law
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basically
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shipping companies only care about how
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much stuff they can fit into their ships
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the cargo that's what they make money on
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these ships themselves are basically
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just containers to be filled
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now if we make a container twice as long
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twice as thick and twice as high
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you might think great you can fit twice
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as much stuff in it but in reality
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you can actually fit eight times as much
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stuff in it
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while only using four times as much
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material to build that container
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this is one of the key benefits of
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shipping over all other mediums of
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transport
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ships can get really big now out of fear
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of sounding like a wendover productions
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video
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this meticulous obsession over numbers
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and scale is what makes the merchant
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navy
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the pack mule of globalization there
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have been a few times on this channel
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where we have commented on nations being
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landlocked and we've always noted that
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as a massive disadvantage
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the reason we gave is that it cut them
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off from international trade via
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shipping and we kind of left it at that
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now the comments rightfully pointed out
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that there are plenty of other ways to
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move stuff around
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trains planes trucks carrier pigeons and
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none of these alternatives require an
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ocean or port infrastructure
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and that's perfectly fair but none of
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these alternatives are nearly as cheap
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as using a ship for
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all of the reasons we saw above trains
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are the efficiency runners-up because
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their steel on steel locomotion offers
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very little friction
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so once they get going they keep on
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going but they still
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lose out to cargo ships and require much
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more infrastructure
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to facilitate this also becomes much
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more difficult to implement if this
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train line needs to span across multiple
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nations that
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may or may not be benefiting from this
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global trade the benefits of shipping
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show some really incredible results that
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you may not expect
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if you wanted to get just one standard
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40-foot shipping container from the
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united kingdom
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to australia you would pay a retail
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shipping rate of around 2
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200 pounds which sounds expensive but
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these containers are very large
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on the other hand if you wanted to ship
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that same container from the uk to
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switzerland
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it would cost 3 100 pounds this is
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despite switzerland being 20 times
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closer
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a ship can sail straight from the uk to
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sydney or work across popular shipping
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routes the container destined for
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switzerland would either have to fly
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or be transported on the back of a truck
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of course
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these are retail rates and major
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exporters would have deals in place with
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shipping companies but the margins are
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actually likely to be wider in these
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wholesale deals
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rather than this one-off example of a
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single shipping container
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now this has implications beyond just
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moving houses
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it can determine the economy of nations
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if a landlocked country wanted to
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compete on price for manufactured goods
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it would not only need to produce items
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cheaper than their competitors
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they would need to produce items cheaper
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than their competitors
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after the expenses of trucking
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components in and finished products out
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are considered what this means is that
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low-cost manufacturing
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is just not really an option for these
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countries which is a major bummer
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because low-cost manufacturing has been
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the driver of nations to make the leap
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from underdeveloped to developed
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bringing millions of their residents out
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of poverty all across the world in
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recent decades
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of course for nations like switzerland
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it doesn't really matter because most of
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their economy is based around advanced
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financial services which don't need to
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be loaded into shipping containers
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and what few products they do
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manufacture are so valuable that
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shipping costs are an irrelevant
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rounding error
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but for a country like mongolia this is
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just an unfortunate reality
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however this status quo has been majorly
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challenged by the fallout of the corona
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virus
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international trade has fallen
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drastically as nations move to close
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borders
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and consumer demand dries up across the
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world there have also been major hits to
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companies that operate a fleet of both
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cargo and passenger ships because
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absolutely nobody is going on a cruise
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these
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days this sunk demand has meant fewer
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containers have been moved which
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requires a fleet of fewer
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and smaller ships to move remember
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smaller ships are far from ideal for
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shipping companies
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now one reprieve has been that oil costs
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during this period
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have been extraordinarily low this has
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been a major win for shipping companies
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for two
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reasons for starters it is offset a good
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portion of the cost of running smaller
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less efficient vessels with smaller
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cargo loads
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but it has also provided a very odd
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revenue source
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you might remember that earlier this
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year oil prices went into the negatives
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we made a video on this weird phenomenon
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but the breakdown was basically that the
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world had too much oil and nowhere to
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keep it before an arbitrary due date
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determined by derivatives that drive the
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oil market
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or even more basically the world needed
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somewhere to keep its oil
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and well oil tankers are great at that
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cunning speculators actually ordered
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space on these tankers got paid to take
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on oil
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sailed the ships around in circles for a
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month and then sold the oil back to the
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market that paid them to have it in the
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first place
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this was obviously a very profitable
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albeit risky strategy for the commodity
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speculator but it was a
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lovely risk-free payday for the shipping
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companies they got paid to effectively
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do what they were going to do anyway
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with their ships which was
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pretty much nothing now this little win
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was great and all
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but it was short-lived oil prices
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stabilized at more reasonable levels and
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the demand for ships
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did not do the same this has all led to
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companies
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starting to make some tough decisions
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during times of economic uncertainty
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responsible governments will roll out
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fiscal
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stimulus that aims to fill the shortfall
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of consumer spending with government
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spending
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the hope of these projects is that they
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can maintain employment incomes and
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quality of life during times of economic
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turbulence
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these stimulus bills can also achieve
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some nice healthy side effects
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for example the usa used this stimulus
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to prop up corporations that might be
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useful to them once the economy recovers
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australia used its fiscal spending to
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keep on propping up a housing market
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that definitely won't end badly
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and there are similar stories of most
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developed nations all over the world
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however amidst the headlines of trillion
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dollar bailouts and quantitative easing
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concerns
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people have overlooked that china is
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doing something very similar
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albeit with a little bit more forward
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planning the chinese government is
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spending hundreds of billions of dollars
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on stimulus
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just the same as everyone else but that
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stimulus is coming in the form of
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infrastructure spending which is a quick
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side note is a real big brain move
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infrastructure stimulus is just
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fantastic it employs people like
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laborers engineers tradesmen in the
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short term it gets money out to local
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suppliers
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all while having the benefit of actually
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producing a bridge or a railroad or a
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shipping port which will continue to
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provide industrial capacity
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into the future okay but despite being a
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very clever piece of policy
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spending on all of these lovely
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infrastructure projects requires a lot
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of materials
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specifically iron the demand for china
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to facilitate these infrastructure
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developments
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has been so strong that it's increased
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the price of iron
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by over 300 percent from where it was
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five years ago this spike in iron oil
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prices has been accelerated by reduced
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supply from nations like australia which
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have been battling with state to state
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lockdowns which means that a lot of
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their miners can't actually get to work
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now this is all well and good commodity
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prices go bro
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but what does that have to do with ships
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well ships are made of steel
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and the money that shipping companies
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will receive for scrapping their ships
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is at the highest point it has been in
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almost a decade
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so these companies have a choice hold
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out and continue to pay millions of
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dollars a year in crew costs
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insurance docking fees maintenance and
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fuel for ships that may or may not go
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back to work in full capacity within the
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next few years
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or scrap them for a payday right now
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unfortunately for all the reasons listed
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above the market for second-hand ships
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is weaker than the market for scrap
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metals so
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it's starting to look like a pretty
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compelling option and one that more and
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more companies will need to exercise
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what they are doing is thinning out
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their fleet starting with the older
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ships first in the hopes that it will
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lower their overheads while giving them
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an injection of cash that they can use
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to ride out the global pandemic
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or maybe even used to invest into the
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next generation of more efficient ships
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it is obviously a gamble if the world
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went back to normal tomorrow
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it would be a terrible move to sell a
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perfectly operational ship for the price
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of its scrap metal
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but unfortunately for many companies
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it's becoming a decision
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that is getting made for them but with
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less and less ships around to carry the
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weight
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what does this mean for the future of
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global trade
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a smaller merchant marine fleet may very
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well be an accelerating factor in the
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push for nations to become more and more
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self-sufficient
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if 2020 has shown anything as if things
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go wrong
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it's every man for themselves for better
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or for worse
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now the trade-off to this
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self-sufficiency will be that global
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trade allows countries
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to leverage their comparative advantage
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that advantage could be
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oil production in the uae luxury cars in
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germany
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or low-cost manufacturing in china if
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any of these countries were forced to
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dabble in the industries of their peers
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they would either do a very terrible job
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of it or produce goods that are
[761]
prohibitively expensive
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global trade has allowed nations to
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focus on what they are good at
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at the expense of being a little bit
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less self-sufficient
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over time the shift from
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self-sufficiency to cooperation has
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always been a positive one
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i mean imagine if you had to produce
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everything you ever needed by yourself
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but will the process be slowed or even
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reversed by these factors
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well yeah probably it looks like that's
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the way the big money is betting but it
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really is just too hard to tell
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for now if nothing else the wrecking of
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ships is a great case study into how
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nothing in the global economy happens in
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isolation lost demand in the united
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states means fewer cargo containers from
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japan
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which is making greek ships useless
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outside of providing raw materials to
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china
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for infrastructure projects that are
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trying to prop up the same demand
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shortfall
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that caused this whole issue in the
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first place
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hi guys i hope you enjoyed the latest
[813]
video if you did please consider liking
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and subscribing
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this video is made possible by our
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patrons over on patreon so if you enjoy
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this video please consider supporting
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like these awesome people did thanks
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guys bye
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