Piracy on the High Seas is Becoming a Major Cost for Shippers

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Global Trade, Logistics

No we are not talking Pirates of the Caribbean… and the perpetrators bear little resemblance to Johnny Depp. The high profile case of Captain Richard Phillips rescue by the US Navy last month is only the tip of the iceberg and though the issue fades from our TV screens, it becomes a growing threat to lives and shipping economics for services having to transit through the West Indian Ocean and the coastal waters off West Africa. Pirates based in Somalia and Nigeria extorted between $18-30m last year (figures are vague because ship-owners prefer not to embolden pirates by talk of ransoms paid). This year alone 80 ships have been seized and 16 vessels are still being held according to a report on moneycentral.msn.com

Somali pirates in the Gulf of Aden have taken most of the media interest so far but a growing threat is pirates off the west coast of Africa based in Nigeria.

Unfortunately the cost to shippers is out of all proportion to the ransoms paid. 1400 vessels sail through the waters off Somalia last month alone and insurance rates have risen from $500 to $20,000 and could reach $400 million annually. Logistics Management reports a surcharge is likely on Asia-Europe traffic transiting the area as ship-owners are faced with the choice of insuring and taking the risk of going through the Suez Canal or adding up to $1.5m in fuel and voyage time to transit the long way round the South African Cape of Good Hope. Routing a tanker from Saudi Arabia to the United States through the Cape of Good Hope, for example, would add 2,700 miles (4,345 kilometers) to the voyage and boost annual fuel costs by about $3.5 million, according to the U.S. Department of Transportation’s Maritime Administration. In addition, it said using that route would mean the ship could make only five round trips a year instead of six, cutting delivery capacity by 26 percent.

The International Union of Marine Insurance is worried this will become a business model copied elsewhere. West Africa already has a growing problem with pirates based out of Nigeria and the Straits of Malacca off Malaysia has experienced similar problems although not to the same extent as Somalia.

With so much downward pressure on sea freight rates the impact for consumers is likely to be low for now. But if capacity becomes scarcer as ships are laid up or demand gradually returns, expect owners to try to raise surcharges to compensate.

–Stuart Burns

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