Why Ships Got So Insanely Big

Summary

This script delves into the evolution and economics of global shipping, highlighting how technological advances and post-WWII policies led to a massive increase in ship sizes and efficiency. It discusses the impact on supply chains, the potential drawbacks of globalization, and the recent trend towards 'nearshoring' and 'friendshoring' as responses to vulnerabilities exposed by the pandemic and geopolitical tensions. The video also touches on the historical context and the future challenges faced by the shipping industry.

Takeaways

• 🚢 Record numbers of serviceable vessels were scrapped 3 years ago due to high costs, favoring tax write-downs and scrap metal value.
• 🔄 The global shipping industry has seen significant changes, with larger ships now taking the place of scrapped vessels.
• 💡 The fundamental economics of the shipping industry are best understood through supply chains like that of a USB flash drive, which involves complex global logistics.
• 📉 Shipping has become incredibly efficient and cheap, enabling complex global supply chains for even basic products.
• 📈 Technological advancements have drastically reduced shipping costs, making global trade more feasible and widespread.
• 🌍 Global shipping faces major challenges, including weaknesses in supply chains and geopolitical issues affecting trade.
• 🏗️ Historical shipping relied on high-cost, small, slow, and dangerous voyages, limited to goods that couldn't be produced locally.
• ⚓ Modern shipping's efficiency is due to larger ships that carry more cargo with fewer crew members, significantly reducing costs.
• 🔍 Post-World War II saw a shipping revolution, driven by technological advances and high demand from rebuilding efforts in Europe and Japan.
• 🏭 The concentration of global shipbuilding in countries like Japan, South Korea, and China has led to ultra-competitive, low-cost ship production.
• ⚠️ Over-reliance on complex global supply chains was highlighted during the pandemic, prompting considerations for nearshoring and friendshoring.
• 🌐 Global shipping and trade have winners and losers, with current trends suggesting even larger disparities in the future.

Q & A

Why were serviceable vessels intentionally scrapped three years ago?

Vessels were scrapped because the cost of maintaining them outweighed their operational value. For modern shipping companies with thin profit margins, these vessels were more valuable as tax write-offs and scrap metal, especially during a period when global trade was severely impacted.

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Outlines

00:00

📉 The State of Global Shipping Three Years Ago

Three years ago, many serviceable ships were scrapped due to high operational costs and the economic benefits of tax write-downs and scrap metal sales. Since then, the shipping industry has seen the emergence of larger vessels, fundamentally altering the global supply chain dynamics. A USB flash drive, for example, undergoes a complex, global journey before reaching consumers. These changes have made global shipping more efficient and cost-effective, enabling intricate supply chains. However, the industry's evolution has raised concerns about the implications of globalization, geopolitical tensions, and the need to rethink supply chains for better economic stability.

05:01

🌐 Historical and Economic Context of Global Shipping

Historically, the shipping industry was expensive and dangerous, limiting global trade to goods that couldn't be produced locally. Early trade involved precious items like tea, spices, and gold. Technological advancements transformed shipping from costly and inefficient to essential for global trade. Post-World War II, shipping saw a revolution with cheap Liberty ships and high demand from rebuilding economies, setting the stage for modern global trade. The shipping industry experienced an arms race in building larger ships, leading to reduced costs and increased global trade. However, this efficiency created dependencies and vulnerabilities in global supply chains.

10:04

⚓ The Challenges and Evolution of Modern Shipping

The modern shipping industry faces challenges from over-reliance on complex supply chains, geopolitical tensions, and evolving infrastructure needs. Despite the efficiency of larger ships, landlocked and developing countries struggle to compete due to insufficient shipping infrastructure. The pandemic highlighted the fragility of global supply chains, leading to a reevaluation of nearshoring and friendshoring strategies. While the U.S. has successfully increased trade with Mexico, replicating this model in regions like Asia and Africa is more challenging. The shift towards regional trade could benefit underdeveloped economies but requires significant adjustments.

15:09

🚢 The Future of Global Shipping and Economic Implications

The future of global shipping points towards greater disparities between winners and losers. Trends indicate the rise of even larger vessels, further centralizing shipping capabilities in a few key economies. The European Union's emphasis on regional trade serves as a case study for friendshoring, with mixed results. The evolving landscape of global shipping highlights the need for strategic adjustments to ensure economic stability and inclusivity in global trade. As the industry moves forward, understanding these dynamics is crucial for addressing the broader challenges facing the global economy.

Keywords

💡Merchant Marine Fleet

The merchant marine fleet refers to the collection of privately owned vessels that transport cargo or passengers for commercial purposes. In the context of the video, it discusses the intentional scrapping of serviceable vessels due to economic reasons, highlighting the cost of maintaining them outweighed their operational value during a period of halted global trade.

💡Supply Chain

A supply chain is the network of organizations, people, activities, information, and resources involved in producing and delivering a product or service. The video uses the example of a USB flash drive to illustrate the complexity of modern supply chains, which involve materials and components from various countries and companies, crossing thousands of kilometers and adhering to numerous trade regulations.

💡Container Ships

Container ships are large vessels that transport goods in standardized shipping containers, facilitating the efficient movement of cargo across the globe. The video emphasizes their role in not only accommodating but also necessitating the complex global supply chains, due to their ability to transport goods cheaply and in large volumes.

💡Globalization

Globalization is the process of increased interconnectedness and interdependence of countries, through trade, investment, and cultural exchange. The video discusses the impact of globalization on the shipping industry, noting the debates and policies fine-tuning it, and how it has led to the current state of global shipping and its challenges.

💡Geopolitical Issues

Geopolitical issues refer to the political, economic, and strategic factors that influence international relations between countries. The script mentions that global shipping is influenced by such issues, including sanctions, trade wars, and the operations of major merchant navies, which can affect the stability and direction of the industry.

💡Square-Cube Law

The square-cube law is a principle in physics that explains how physical properties scale with size. In the context of the video, it is used to explain why larger ships are more efficient; a ship with eight times the volume of another uses only four times the material but can carry eight times the cargo, contributing to the trend of increasing ship sizes.

💡Panamax

Panamax is a term used to describe the size of ships that can pass through the Panama Canal. The video discusses how the canal set a limit on ship size for a time, leading to the popularization of Panamax-sized ships, which were designed to fit through this vital trade route.

💡Shipbuilding

Shipbuilding is the construction of ships and maritime vessels. The script highlights the competitive nature of shipbuilding, with countries like Japan, South Korea, and China leading due to their lower labor costs and high industrial capacity, which has shaped the global landscape of ship production.

💡Economic Prosperity

Economic prosperity refers to the state of a country or region being economically successful and thriving. The video connects historical access to waterways with economic prosperity, noting that efficient water transportation has historically been a strong predictor of economic success.

💡Landlocked Countries

Landlocked countries are nations without direct access to the sea, which can pose significant challenges to their economic development. The video points out that, despite potential competitive advantages, such as cheap labor, landlocked countries often struggle to compete in the global economy due to the lack of access to ocean shipping.

💡Nearshoring and Friendshoring

Nearshoring and friendshoring are supply chain strategies that involve sourcing goods from nearby countries or those with close political and economic ties. The video suggests these strategies as potential solutions to the vulnerabilities exposed in global supply chains, offering more stability by reducing reliance on distant or politically volatile regions.

Highlights

Record numbers of serviceable vessels were scrapped due to high maintenance costs and low global trade during the pandemic.

The shipping industry has seen the introduction of some of the largest ships ever, reflecting changes in global trade dynamics.

A USB flash drive's supply chain exemplifies the complex, global journey of even basic consumer goods.

Container ships have revolutionized global supply chains, making the transportation of goods more efficient and cost-effective.

The cost of shipping has significantly decreased, allowing for the globalization of trade and the movement of goods across the world.

Global shipping is not a mature industry and is currently facing both internal and external challenges, including geopolitical issues.

The history of global shipping has been shaped by technological advancements and economic policies.

Early global trade was limited to high-value goods due to the high costs of shipping.

Post-World War II, the global economy and decommissioned ships set the stage for a shipping revolution.

The square-cube law has influenced the size and efficiency of cargo ships, leading to larger vessels for more cost-effective shipping.

Shipping companies compete on price, especially in commodity markets, driving the need for more efficient ships.

The demand for larger ships is driven by the need for more efficient transportation to accommodate global trade.

Landlocked countries struggle to compete in the global economy due to the lack of access to large-scale ocean shipping.

The average size of the global shipping fleet has doubled in the last two decades, reflecting increased trade and ship efficiency.

Global shipbuilding has become an industry that goes to the lowest bidder, with Asian economies leading in ship production.

The future of global shipping may see a concentration of winners and losers, with implications for developing economies.

The COVID-19 pandemic exposed vulnerabilities in global supply chains, prompting a reevaluation of reliance on distant trade.

Nearshoring and friendshoring may offer solutions to supply chain vulnerabilities by promoting regional trade.

The European Union serves as a case study for regional trade prioritization and its potential impacts on global trade dynamics.

Transcripts

3 years ago, this was the state of the global merchant marine fleet. Record numbers of perfectly

serviceable vessels were intentionally scrapped because the cost of keeping them in the water

meant that for modern shipping companies operating on razor thin margins,

they were worth more as the tax write down and scrap metal than they were sitting around

at a time when global trade was ground to a halt. In the 3 years since, a lot has changed and some

of the larger ships ever have taken their place. But perhaps the best way to understand these

changes is to understand the fundamental economics of the shipping industry with something like this.

This is a USB flash drive, a cheap, almost disposable consumer electronic that retails for

around 7 US dollars. Now this is the approximate supply chain that that flash drive took to get

to its average end user in the east coast of the USA. Materials, components and packaging

crisscrossed dozens of countries, hundreds of companies, thousands of kilometers and an equally

long list of trade rules, guidelines and sometimes less than friendly competitors.

Even the most basic goods sold in economies around the world today travel considerably

further in their lifetime than the people who end up consuming them and that's all thanks to these,

container ships. These enormous vessels are so efficient at transporting goods around the world

that they've not only accommodated global supply chains that look like this,

they've necessitated them. The reason that even relatively basic products like this crisscrossed

the world before getting to store shelves is ironically because it's so much cheaper to

do it this way. But this is a relatively new phenomenon and something that shouldn't be taken

for granted. Just a few advancements in technology took shipping from an expensive and inefficient

process reserve for only the products that absolutely needed it to something that is absolutely

needed for almost all products. But this isn't always for the best. A lot of economists have

spent a lot of time fine-tuning the policies of globalization, a divisive and evolving issue in

almost every country in the world. But it's probably more effective to look at the changes

that made this debate possible in the first place. Global shipping is far from a mature

industry and it's at something of a crossroads at the moment facing major challenges internally

and externally with talks of stepping back from supply chains like this because of weaknesses

that were exposed in the last half decade. On top of that, there is the evolving issue of

major merchant navies operating around the world on varying sides of sanctions, trade wars and

other geopolitical issues. It is a lot, but understanding the issues facing global shipping

is a great way to understand the issues facing the global economy. So what is the history of

global shipping and how did we get here? Why are the challenges to the ultra-efficient status

quo so serious all of a sudden? And finally, could gradual rethink of overly complicated supply

chains actually be a good direction for the global economy? The problem with understanding

trade agreements is that often the agreements themselves are so long that nobody in their

right mind would be able to read them, let alone understand the nuances and pick out important

details. It's the exact same with news, a barrage of information that is filled with bias

perspectives, incentives and blind spots that you don't see if you aren't completely engrossed in

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sane in our increasingly chaotic information landscape. Global shipping is nothing new by

itself. People have been moving stuff over water since before we had wheels to move stuff over land.

Access to waterways has always been a strong predictor of economic prosperity. Not only

for the drinking water it provides fledgling civilisations, but also the ability to transport

supplies and messages over large distances very efficiently. Even today the inland waterways

in countries like the United States and China facilitate a significant portion of their industrial

economic activity because of how efficiently it gives industries access to cheap transportation.

Only rail can really get close to the efficiency of moving stuff over water,

but rail lines have the disadvantage of actually needing to be built, which for most of human

history we just didn't have the technology to do, and even when we did these lines represent huge

capital investments. Waterways on the other hand can be navigated by basic barges and they exist

naturally. Of course this kind of shipping throughout history has mostly accommodated

the movement of goods within nations or at most direct neighbours, but that changed the

shipbuilding creative vessels capable of exploring and eventually trading across the

world's oceans. Early colonial trade was of course very different to the type of trade that

takes place today, which is hopefully well at least slightly less exploitative, but even back

then it still relied on the same basic economic variables. The region where the goods were coming

from needed to have a price advantage in producing the goods that they are exporting.

That price advantage needed to exist even after the cost of shipping was accounted for,

and the economy importing the goods needed to have the capacity to pay for those goods at

sufficient scale to make this whole operation worthwhile. In the early days of global shipping,

the shipping itself was by far the most expensive part of this whole process.

Ships were incredibly small by today's standards, they were also very slow,

and ferrying cargo around the world was incredibly dangerous, so the large crews of these vessels

needed to be well compensated for their work. The only goods that would remain cost competitive

to ship across the world at this time were the goods that literally couldn't be produced or

harvested from the countries that would eventually consume them. This was of course tea, spice,

gold, silver, and yes tragically enslaved human beings as well. The earliest companies in the

world, at least in the form they exist today, started by taking advantage of the huge margins

they could make from the cost to extract or trade resources in Asia and the Americas,

and sell them back in Europe which at the time was far more industrially advanced. Even today,

the gap between how cheaply a producer economy can export goods and how much a consumer economy

is willing to pay for them is a margin that can cover the cost of shipping with hopefully a little

bit of profit left over for the merchants themselves. Now while this fundamental equation

hasn't changed, the numbers have. Obviously major technological advances took the world from

sailing ships to steam ships to the modern steel giants that roam our oceans, and as that has happened,

the price to move cargo across the world has gone from something many multiples of the initial

value of the cargo itself to something almost completely incidental in the end cost of most

products. After the Second World War, the global economy was primed for a shipping revolution,

as both the technological chicken and the geopolitical egg were perfectly set to make

global trade the logical economic policy. Transatlantic and Pacific logistics were a major

factor in the Allied victory in the Second World War, and decommissioned Liberty ships,

which were the basic cargo vessels used by the Allies to do most of that logistics,

were sold to early shipping companies around the world. These ships weren't great, but they were

cheap. Even still, global trade at this point wouldn't have been economically viable at scale

if it wasn't for the post-war rebuilding efforts in Europe and Allied-occupied Japan.

This meant that there was high demand for imports to supply these rebuilding efforts.

Eventually it was hoped that by rebuilding these economic centres they could also reverse this flow

and become consumers of export goods from the USA, and of course there was also the small benefit

that prosperous countries would be less likely to fall to communism. The world was dividing into

ideological blocks, so just as Western Europe and the USA were trading more intensely with one

another, the Eastern Bloc was also trying to assist their comrades. It may have been born out of

ideological rivalries rather than strict economic efficiency, but this environment was highly

conducive to big investments into shipping, and thanks to a quirk of our three-dimensional

universe, those investments started something of a shipping arms race. A ship that is twice the

length, twice the beam, and twice the height of another ship will actually use four times as

much material to construct, but it will be able to carry eight times as much cargo. This is the

square cube lore, and it's part of the reason, amongst many other problems, that small early

cargo ships couldn't get shipping costs down that much. Modern ships with eight times of volume

also don't need significantly more manpower to operate. Some of the largest ships roaming the

world's oceans today are crewed by just a dozen or so highly-trained seamen, far fewer than the

post-war Liberty ships and an order of magnitude fewer than the early sailing vessels. By the 1970s

the mass was clear, bigger was better, and since the ocean is wide open space, the average size of

container ships and resource freighters grew dramatically. Shipping companies were more than

ever competing on price, especially in commodity markets like oil, raw materials, and foodstuffs.

Something like crude oil is more or less fungible with no real way to differentiate between oil

drilled in the Middle East or oil drilled in Texas, so the shipping companies that were able to most

efficiently move this growing energy source from where it was produced to where it was demanded

were easily going to outcompete their rivals. The only real limit on how large these ships could

get was the shipbuilding and port infrastructure to accommodate them and the demand to utilize them.

Starting with the last restriction first, a ship that can carry 8 million tons of cargo,

maybe twice as efficient as a ship that can only carry 1 million tons of cargo,

but if the routes that the ship is servicing don't demand enough volume to fill that larger ship,

then it's all pretty much pointless. That's simple enough, but it again shows the economic

feedback loop between global shipping, global trade, and global economic activity. As economies

around the world produce more output, they usually trade more intensely with one another.

As more global trade is done, larger, more efficient ships can be used to accommodate

that trade, as larger, more efficient ships are used, shipping costs decrease, making shipping

cheaper, and as shipping gets cheaper, the more intensely countries can trade with one another.

Today, shipping costs are so low between major economies that especially for small goods like

chips and capacitors for that USB flash drive, it doesn't really matter how many times components

have to crisscross the world, all that matters is finding the cheapest possible suppliers.

For larger, heavier, and lower volume items, the shipping costs are still wide enough that it

often makes sense to produce these goods locally, which is why building materials, for example,

aren't transported as much as laptops. Now, this trade dynamic does have one small caveat.

It only really works between major economies, and it only really works if they have access to the

ocean, although at this point that's effectively saying the same thing. We have explored dozens

of countries on this channel before that are landlocked, but with only the exception of a few

outliers in Europe, we always end up saying the same thing. It's basically impossible for these

countries to compete in the modern global economy no matter how cheap their labor is,

because without large-scale ocean shipping, this equation just doesn't work out for them.

The only exception is again for countries that have goods which simply can't be found in most

parts of the world like rare materials and gemstones with very few other suppliers. The price

of these goods is what it is, and the air consumer has to accept the higher cost of shipping just

like the spices from the days of colonialism. Or in the case of those few European landlocked

countries, cross-border services like finance don't really rely on shipping at all.

Now just being on the ocean isn't enough by itself anymore. As the global economy has grown,

the headroom for larger ships has grown along with it. The average size of the global shipping

fleet has doubled in just the last two decades, motivated primarily from more intense trade between

a smaller number of significantly larger economies. A new trend is also ships that are pushing the

limits of size to the extreme. Infrastructure was the last bottleneck for many shipping companies,

most notably the Panama Canal. The century-old piece of infrastructure held most ships to

a size limit for some time, with most companies trying to make ships that would just fit through

this vital route. This kind of ship is so popular that it has its own class designation, the Panamax.

But in the last few years, the drive for even cheaper shipping has forced shipping companies

to become ultra-specialised and build ships specifically designed to operate in just one ocean.

With no hope of ever fitting through the Panama Canal, shipping companies, especially those

operating in the Asia-Pacific region, could once again start building bigger. In a period where

a record number of ships were getting scrapped for the price of their raw materials, container ships

that could transport over 20,000 standard shipping containers were getting built on mass. Of the 20

largest container ships in the world, all 20 were built within the last decade, and these ships

often come in batches, with five or more sister ships being constructed at the same time. The

reason that the average size of cargo ships has doubled over just the last two decades is because

smaller ships are getting scrapped and larger vessels are becoming more and more popular.

This also means that there are a smaller number of ports and shipyards in the world that are

capable of producing and docking competitive vessels. The USA, despite an early historical

lead, didn't remain competitive with cheaper shipbuilders that grew in the rapidly industrialising

Asian economies of the last half century, most notably Japan, South Korea, and now of course

China. Just as global shipbuilding has accommodated global industry that runs on razor-thin margins,

where a few cents in production costs can be worth shipping something halfway across the world,

building ships itself has become an industry that just goes to the lowest bidder. These three

countries were in the right place at the right time to be the current leaders in global shipbuilding.

They had lower labor costs than shipyards in the USA, but they still had enough industrial

capacity to reliably produce competitive ships. A fine line to walk, and even though salaries

in these countries have now increased significantly, they have such a large investment into infrastructure

and such a good reputation for building cargo vessels that it's effectively impossible for

any other economies to compete with these shipyards because, well, ships are extremely easy to ship

anywhere in the world. Now, while this has been great for delivering low-cost consumer items,

it's also pulled up the ladder and created an uncertain future. You know the line, nobody can

predict the future least of all economists, but that doesn't mean the concerning trends

shouldn't be accounted for, and the concentration of global shipping will have its winners,

but it'll also have major losers. Not only could countries that aren't on the ocean be cut out of

mutually beneficial global trade, economies that aren't big enough to justify large

efficient ships and the large port infrastructure to support them could be too. The low-cost

manufacturing of basic goods and then exporting those goods has been the pathway to prosperity

for most of the major economies that have developed over the last half century, but

if it becomes comparatively much more expensive to ship out of the new collection of developing

economies, the ladder could be pulled up in front of them. Even a country like Bangladesh,

which we explored last month, should theoretically have the perfect set of economic factors to

compete in low-cost global exports. It's close to other industrial centres, it's a long major

trade routes, and it has an extremely large low-cost labour force. But among other problems,

it lacks good shipping infrastructure, which means even though it shouldn't,

dearly, be more competitive than its neighbours, it isn't. Now, there might be some good news here.

The global pandemic, alongside other geopolitical tensions, has shown that an

over-reliance on supply chains that are at the mercy of ever-changing import, export tariffs,

trade restrictions, sanctions and local business policies might be highly efficient when running

smoothly, but like all finely-tuned machines, they're susceptible to even small disturbances,

causing the whole thing to grind to a halt. At the height of the pandemic, the cost of transporting

a standard shipping container between the two largest economies in the world increased by a

factor of 10 within just a few months. That alone, completely disregarding everything else going on

in the world, was an indication to businesses and policy makers that this status quo wasn't

something that could be relied on. Now, the idea of nearshoring and friendshoring were economies

within the same region, or economies more closely aligned with one another, trade more with one

another, instead of everybody around the globe, could be a solution to this. Smaller, closer

supply chains with economies less prone to political interference, should all other things

been equal, make trade dynamics more stable. And that could extend an opportunity to underdeveloped

economies that may not be competitive globally, but could be competitive within their region.

The USA now trades more heavily with Mexico than it does with China, despite the fact that

Mexico is not nearly as competitive as an industrial economy globally. However, while this has worked

for one developing economy that is lucky enough to be on the doorstep of the largest consumer

market in the world, it's going to be much harder to replicate in regions like Asia and especially

Africa, where they don't have the same large consumer markets available for anything these

economies can produce. Highly efficient global shipping, just like the globalization it

enabled, has had winners and it's had losers. It's difficult to have one without the other,

but the trends in the global shipping fleet suggest we're heading towards a future with

even bigger winners and even bigger losers. Now, we've mentioned the idea of friendshoring in

this video, and the obvious case study for this is the European Union, a group of economies that

have prioritised regional trade, perhaps to a detrimental degree over the last three decades.

We recently made a video on that, and as always we didn't want to repeat too much here,

but you should be able to click to that on your screen now. Thanks for watching mate, bye.