Industrial Piracy

BIMCO has spoken out against what it deems, “industrial piracy” and the cost implications posed to shipping.

With pirates using “mother ships” to launch attacks the piracy infested area has  enlarged to take in most of the northern part of the Indian Ocean – resulting amongst other things in an enlargement of the War Risk Zone by the Joint War Committee to cover much more than just the Gulf of Aden and subsequently increased costs as a result of increased insurance payments and longer sailing distances in order to avoid attacks and a potential hijack and hostage situation” says the report.

Moreover the oil price and thus also bunker prices have soared and increased the cost of piracy considerably since the second update in April 2010. The chartering markets conditions have improved substantially in the container segment while the tanker segment has experienced sliding time charter rates. All these elements affect the cost picture that the industry faces, and on that background, an updated version of the cost calculations regarding the decision to go round the Cape of the Good Hope or stay on course for a Suez Canal transit is provided.

In a bid to estimate the costs involved to determine whether it’s economically viable or not for a ship owner to have his vessel sail round the Cape of the Good Hope to avoid a potential piracy incident, BIMCO has issued an updated report. According to it, the overall conclusion is very clear.

“To limit the risk of meeting pirates by sailing round the Cape of Good Hope instead of going via Suez Canal, you add high costs. An owner of a Post-Panamax container ship will increase costs by USD 11.2 (4.0) million while an owner of a Very Large Crude Carrier (VLCC) will face increased cost by as much as USD 9.6 (8.8) million per annum. (The numbers in brackets are the cost as per April 2010.) What has changed since the last update in April? One important economic issue that has changed the picture dramatically is the bunker prices which have gone up to USD 640 per tonnes from USD 482 per tonnes. This increase of 33% affects both the container and the tanker calculations. Time charter rates have increased almost three-fold for container vessels but dropped one-third for tankers. Asset prices are estimated unchanged for the 10,000 TEU Post-Panamax container ship at (USD 115 million), while the asset value of the VLCC has slid by 8% to USD 75 million. Suez Canal tolls including additional transit costs have increased by 3%. Moreover the estimated risk premium applied to each vessel in doing a Suez transit via Gulf of Aden has gone up from 0.1% to 0.15%” said shipping analyst Peter Sand.

With pirates attacking most parts of upper Indian Ocean it is impossible for oil tankers to avoid piracy infested areas when sailing into the Arabian Gulf (AG) to pick up a cargo of Middle East crude oil. The enlarged risk zone has meant that no such thing as a “piracy safe passage” exist for oil tankers and other vessels sailing into AG.

“In today’s shipping markets and given the model assumptions, the economic analysis reveals that the expenses originating from the very high bunker prices are totally dominating the results. Even though charter rates and asset values have changed a lot, these factors remain secondary to the effect of the fuel price by a landslide. Not even dramatic tumbles in time charter rates down to USD 5,000 a day would make much difference.

The only thing that can change the economic sense and make the cost picture turnaround is the insurance risk premium per transit via the Suez Canal through the Gulf of Aden. Should the estimated premium of 0.15% jump four-fold to 0.6% of the ship value applied to each transit it would make the insurance premium per transit of a container ship valued at USD 115 million equal to USD 690,000 per transit and that would change the picture. Such an extraordinary jump in insurance premium would thus make going round the Cape of Good Hope the preferred choice, as it would become the least costly option for the ship owner. What matters the most in the cost calculations?

For a liner company it is primarily a question of higher bunker expenses due to the large consumption of fuel oil for the very powerful engine, while a tanker company primarily is concerned with the added capacity costs even though the fuel consumption also plays a significant part. In the current market conditions a lot of shipping companies turn to slow steaming of the vessels, some even do super slow steaming which reduces the use of fuel by 30% or more.