Piracy business coping well with credit crunch

Published: January 9, 2009

November was a bumper month for Somali pirates, who managed to capture a super-tanker carrying US$100mn of Saudi oil, while also successfully ransoming a vessel bearing millions of dollars worth of Ukrainian arms.

Somali pirates have captured over 30 vessels this year and attacked over 90, and held hundreds of seafarers captive for months at a time. At last the international community is acting against a problem that has been around for at least a decade. Various countries’ naval ships have been sent to the Gulf of Aden and resolutions issued, but still the problem persists.

The direct cost of Somali piracy is related to the payment of ransoms and falls on the shipping companies whose vessels and crews are hijacked. Total ransom payments are likely to be somewhere in the region of US$30mn-US$40mn so far this year. But the amount paid in ransoms only represents a fraction of the total cost to the companies; negotiation fees, legal fees, delivery of ransom money and the cost of lost business can easily treble or quadruple the ransom demand meaning that the total direct cost of piracy of Somalia is likely to be well over US$100mn this year.

Although the immediate costs to shipping companies affected are high, the actual and potential consequences and costs are much higher, and broader. Already some shipping companies have said they now regard the Gulf of Aden / Suez Canal route as too dangerous and will be taking the longer route around the southern tip of Africa. This can add anything from 10 days to three weeks to journey times from the Middle East and Asia to Europe and northeast America. If more companies take the view that the potential risks are too high then the impact of piracy could be felt globally. Increased numbers of attacks have also pushed up insurance premiums for passing Somalia from the hundreds to the thousands of dollars so ship owners now have an additional incentive to avoid the route.

Consumers in Europe and northeast America are likely to be burdened with the extra costs associated with the additional steaming time. Bearing in mind that around 13% of oil from the Middle East currently passes through the Gulf of Aden and the route is the fastest from Asia to Europe the impact could be widespread.

There are many factors that will impact on price rises but even if other factors push in a deflationary direction increased transportation costs would reduce that effect. The country that would feel the biggest financial impact if a wholesale rerouting of shipping occurs would be Egypt.

Revenues from the Suez Canal rank second behind tourism as the major earner for Egypt’s economy and the loss of such a major income source would be devastating.

Egypt’s minister of investment, Mahmoud Mohieldin, tells emeafinance: “The problem of piracy is a global one, not one just affecting ships that go through the Suez Canal. It has hit ships who take other routes too. We are looking into security responses now.”

Ever since the capture in October of the Faina, the Ukrainian ship laden with Russian tanks, the international community has begun to pay serious attention to Somali piracy. But even with US, UK, Russian, Indian, Malaysian and Nato ships in the region we have seen pirates carry out the most audacious attack to date, the capture of the Saudi super-tanker the Sirius Star in November.

Navies are hampered by a number of factors: the legal position of pirates picked up by navies is unclear and on several occasions pirates who had been apprehended have been released again. The pirates have also increased the area they threaten.

In the past, 50 nautical miles off the Somali coast was considered a safe distance, then it was 200, now the pirates operate up to 500 miles off the coast and a huge swathe of the northeast Indian Ocean is threatened.

The capture of the Sirius Star has demonstrated that there are now almost no ships that are safe from pirate attack, meaning navies can no longer identify ships that are particularly at risk and focus on them. In short, given the area the pirates cover and the number of vessels they are capable of attacking, the task is too large for the naval assets presently available. And with the ongoing wars in Afghanistan and Iraq and the expense of naval operations it seems unlikely that many more ships will become available.

Roger Middleton is a consultant Africa researcher at Chatham House