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Pirate attacks drive up the cost of shipping

Shipping your oil across the Gulf of Aden? Don't forget your piracy insurance.
While some shipping companies, such as the world’s largest, Maersk, have decided to take their oil tankers around the Cape of Good Hope, others have been reluctant to shoulder the extra expense.
While some shipping companies, such as the world’s largest, Maersk, have decided to take their oil tankers around the Cape of Good Hope, others have been reluctant to shoulder the extra expense.Sayyid Azim / AP
/ Source: The Associated Press

Shipping your oil across the Gulf of Aden? Don’t forget your piracy insurance.

As a ragtag group of gunmen faced off for days against the U.S. Navy near the coast of Somalia before a cargo ship captain was freed Sunday, industry-watchers say shipping companies already smarting from the global downturn are forced to pony up extra cash for steeper premiums to cover multimillion dollar ransoms or take the long way around African continent in the hope of dodging hijackers.

“The pirates were the only people who had a good year in 2008,” said Crispian Cuss, a security consultant with the Dubai-based Olive Group.

The Gulf of Aden, which connects the Indian Ocean to the Red Sea and the Suez Canal, is one of the busiest and most dangerous waterways in the world. As pirates have become more aggressive, the cost of insuring ships has gone up. Some companies are spending more time training their crews, others are avoiding the area altogether — taking long trips around the Africa’s southern tip that can potentially add millions to the cost of each journey.

While the coast of Somalia has been a problem for years, it was flagged in May as an area of particular concern by Lloyd’s Market Association, and premiums have been rising — at least tenfold, according to some media reports. Neil Smith, the senior manager for underwriting for Lloyd’s Market Association, has said the exact figures are commercially sensitive in a highly competitive industry.

Large ships generally carry three separate types of insurance. Marine — or hull — insurance covers physical risks, such as grounding or damage from heavy seas. A second type of policy, protection and indemnity, covers crew issues, while war risk insurance covers acts of war, insurgency, and terrorism.

Although war risk policies typically cover hijackings and piracy, insurers often charge extra for ships that venture into high risk areas such as the Gulf of Aden. Others, including Chicago-based Aon Corp. and London’s International Security Solutions Ltd., have recently launched new plans specifically tailored to cover losses incurred by piracy — for example by including ransoms and cargo delays under the same policy.

The other option available to ship operators, taking the long way around Africa’s Cape of Good Hope instead of the short cut through the Suez Canal, is also expensive.

Routing a tanker from Saudi Arabia to the United States through the Cape of Good Hope, for example, would add 2,700 miles 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.

European economies stand to absorb most of any extra expense. The Maritime Administration says more than 80 percent of trade moving through the gulf is with Europe.

While some shipping companies, such as the world’s largest, Maersk, have decided to take their oil tankers around the Cape of Good Hope, others have been reluctant to shoulder the extra expense, according to Graeme-Gibbon Brooks, the managing director of Dryad Maritime Intelligence Service, based in the English port city of Southampton.

“We have had a couple of phone calls from people saying: ’It might well be safer to go around the Cape of Good Hope, but our competitors are not doing it,”’ Brooks said. “The problem with any diversion, be it through the south of the cape or elsewhere, is that it’s going to have a commercial impact which will ultimately be borne by the consumer.”

But one analyst said the global downturn may be making the southern route more attractive.

“Because there are so many vessels plying the seas right now, it makes sense to take the leisurely way around Africa. ... You’re removing capacity from the industry and helping to put upward pressure on freight rates,” said Jim Wilson, the Middle East correspondent for Fairplay International Shipping Weekly magazine.

As a result, demand for fuel on the West coast of Africa has surged as more ships coming from the east need to refuel after circling the cape, he said. At the same time, Egypt’s revenues from Suez traffic are down sharply from last year.

The pirate attacks have begun to spook some mariners. Noel Choong, head of the International Maritime Bureau’s piracy reporting center in Malaysia, noted that the crew of one ship recently refused to travel from Mombasa, Kenya, to South Africa for fear of being attacked.

Still, as security consultant David Johnson noted, taking the long way around to avoid the Somali coast doesn’t guarantee safety from pirates. The Saudi supertanker Sirius Star was captured by pirates six months ago while deep in the Indian Ocean, far from the pirates’ traditional hunting ground.

“Whichever way you go you’re going to run into pirate hotspots somewhere down the line,” said Johnson, the director of U.K.-based EOS Risk Management.

Insurance companies have also taken note of the pirates’ increased range:

“Until recently, insurers regarded vessels as being relatively safe if they kept a reasonable distance from the Somali coast,” said Smith, the manager at Lloyd’s Market Association. Writing in the February-March issue of Cargo Security International, he said the situation had now changed.

The latest pirate attacks come at a particularly challenging time for the shipping industry.

Dubai-based DP World, one of the world’s biggest port operators, warned last month that a falloff in global trade that began late last year “shows little sign of easing” because of the global recession.

Drewry Shipping Consultants Ltd. recently predicted cargo container shipments globally will drop 4.5 percent this year following decades of constant growth.