Shipbreaking: How mega ships get recycled

Today, Brian Flaherty takes us through the hidden life of ships.

Let’s go 👇

Shipping: A truly global industry

Shipping is like a glue that connects humanity.

While ships don’t have as much presence in our everyday lives as cars or trains, they’re absolutely critical to the global economy.

International trade completely depends on cargo ships and tankers, as 90% of the world’s goods are ​transported by sea​. As global trade has flourished through globalization, the volume of goods transported has nearly doubled since 2000, to ​11 billion tons​ of goods shipped each year.

Thanks to flying, international tourism relies less on ships than it used to. But cruise ships still ferry ​tens of millions of people​ on vacations each year, despite a severe drop in traffic since Covid.

Royal Caribbean’s new Wonder of The Seas is the largest cruise ship ever built. (It holds 9,288 people, but I won’t be one of them)

While a ship’s role in facilitating trade/tourism brings it around the world, ships themselves also take a global journey as part of their lifecycle.

As ships go from construction to destruction, they go from country to country.

The journey begins with shipbuilding, which is distributed among two main industry centers.

Where are mega ships built?

Commercial ships are even bigger than cruise ships.

The ​Ever Alot​ is one of the largest container ships ever created. If you stacked it vertically, it would be taller than the Empire State Building.

Building such huge vessels requires highly specialized industries. Today, two regions of the world dominate shipbuilding.

East Asia

Commercial ships, like cargo ships and tankers, are mostly built in ​East Asia​.

In 2022, China produced about half of the world’s total output of merchant ships, with the remaining production mostly occurring in South Korea and Japan.

Europe

It may surprise you to learn that ​Europe​ is actually the world leader in manufacturing cruise ships.

Italy, Germany, France, and Finland lead the way here.

Italy’s Monfalcone Shipyard in Italy is run by​ ​Fincantieri​​, Europe’s largest shipbuilder.

Why have European shipyards dominated cruise shipbuilding, even as commercial shipbuilding has relocated to Asia?

There’s no simple answer. But one possibility is that cruise ships are intricately designed projects where operators are willing to pay a premium to delight tourists.

Cargo ships and tankers, meanwhile, are generic builds where efficiency takes priority.

Historically, Asia could use lower labor costs to compete in commercial shipbuilding, but not cruise shipbuilding.

Once ships are completed, they don’t stick around in their country of origin.

Where they head next, though, may be a surprise.

Flags of convenience

Quiz: Which country has the largest share of the global ship registry?

If you guessed America or China, you’d be wrong. Instead, the answer is plucky Liberia, who recently ​took the crown​ from rival Panama.

For those of you who play ​Tradle​, it’s not everyday you see “Passenger and Cargo Ships” as a country’s largest import and export! Liberia’s economy completely revolves around shipping.

Looking at the ​list of major players​ in global ship registrations, the names might seem odd. Countries like Singapore, Malta, and The Marshall Islands all make an appearance.

The ​Liberian Registry​ is the largest and fastest-growing ship registry. 14% of the world’s oceangoing fleet is registered in Liberia. 🇱🇷

What’s going on here?

Ships registered to these countries aren’t really being operated by companies in those countries.

Instead, the ships are registered under “flags of convenience,” and are operated by a foreign entity.

  • The Wonder of the Seas, for instance, is the flagship of American cruise ship operator Royal Caribbean, but it’s registered in the Bahamas. 🇧🇸
  • Despite being operated by a Taiwanese company, the ​Ever Alot​ (the mega cargo ship we mentioned previously) is registered in Panama. 🇵🇦

Why do ship operators fly flags of convenience?

Simple: to avoid taxation!

In the United States, for instance, an archaic tax code provision means that ​foreign ships don’t have to pay domestic taxes​ (as long as the foreign country agrees not to tax American ships in return.)

This tactic frequently means that major cruise operators pay ​paltry tax rates​, which can be less than 1/10th of standard corporate tax rates.

The other reason is labor laws. Flying flags of convenience also means that companies can avoid the labor laws of developed countries.

Laborers building ​cruise ships​ and ​cargo ships​ can be paid just a few dollars an hour.

As shown in Nicholas Cage’s classic film Lord of War, choosing the right flag to fly under helps you get away with more than tax avoidance.

Once ships have finished sailing the seas under a convenient flag, they’re ready for the last stage of their lifecycle.

We now travel to South Asia, where most large ships get decommissioned and deconstructed.

What is shipbreaking?

Large ships have a useful life of ​25-30 years​. After that point repairs typically become uneconomical.

But these ships aren’t just brought to a dump; they’re broken down and sold for scrap, in a process known as shipbreaking.

The majority of the world’s shipbreaking industry is in South Asia. In 2022, ​over 80%​ of ship dismantling occurred in just three countries: Bangladesh, India, and Pakistan.

In the South Asian shipbreaking industry, most vessels are “beached.” This is an​ ​extremely controversial practice​​, with poor safety standards, low worker pay, and the potential for significant environmental degredation.

  • To “beach” and break down an aging ship, operators first navigate their vessel to one of the many beach-based shipyards on the South Asian coast.
  • They wait for high tide, then ram the ship at full speed onto the beach.
  • When the tide recedes, workers break it down, in a process that could be described as shockingly manual.

Despite ethical concerns, shipbreaking can also be considered an inspirational model for proponents of the ​circular economy​.

When ships are broken down, nearly everything is recycled and reused, including the steel hull, the beds, and kitchen utensils.

Shipbreaking is one of the​ most ​dangerous jobs​ in the world​. Looking at images like this, it’s no wonder why.​ Source​: ​gcaptian.com​

In recent years though, TĂĽrkiye has been growing in popularity as the shipbreaking destination of choice.

Turkey has greater oversight of shipbreaking regulations and a better track record of worker safety. Instead of beaching, ships are broken down in proper docks using cranes. (What a concept!)

As ESG pressure on public companies has grown, more firms are choosing TĂĽrkiye as a shipbreaking destination over South Asia.

Of course, choosing safety comes at a price.

To understand what that price is, let’s take a closer look.

The economics of shipbreaking

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Author

Brian Flaherty

Brian Flaherty

Brian's interest in finance started from an early age, when he used money saved from working summer jobs to purchase his first mutual fund at 15. He went on to pursue the field in school, eventually graduating from the University of Virginia with a Bachelor's degree in Economics. After graduation, Brian put his expertise to work advising institutions and high-net-worth investors as a strategist at a wealth management firm. Recently, Brian transitioned to pursue a career as a financial writer, where he leverages his writing skills and his financial knowledge to help investors uncover the best opportunities and make intelligent use of their capital.

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