Pirate attacks damage eastern African caustic soda trade

08 March 2012 17:04  [Source: ICIS news]

LONDON (ICIS)--African caustic soda buyers and sellers have come under increasing price pressure because piracy along the continent's eastern coastline has forced up insurance and freight costs, industry sources told ICIS on Thursday.

There were 46 incidents of pirate activity worldwide in January, up from 17 the previous month, said a report by Dubai-based logistics firm GAC Protective Solutions and UK-headquartered risk mitigation firm AKE Group.

As a result, firms providing insurance against loss or damage caused by pirates have increased their fees.

According to ICIS data, insurance premiums have grown by as much as 43% since last year because of increasing ransom payouts and other costs associated with pirate attacks.

There are four main areas insurance can offer cover for: war risk, kidnap and ransom, cargo, and damage to the hull of a ship.

Most vessels operating in east African waters now carry armed guards and security personnel which also add to costs. An additional measure vessels utilize against pirate attacks is to increase sailing speeds. Some ships choose to avoid eastern Africa altogether and re-route to sail past southern Africa instead. However, this means the vessels use more bunker fuel, adding to already high fuel costs.

"It now takes about five or six days longer for freight to arrive in Durban, [South Africa] than previously. Normally ships would arrive in 15 days from the Middle East. Now it takes 20-22 days," a southern African trader said.

A breakdown of charges by Colorado-based non-governmental organization (NGO) One Earth Future (OEF) Foundation shows that increasing speed adds $2.7bn (€2bn) to fuel costs annually. Military operations accounted for an extra $1.3bn while providing security equipment and armed guards cost about $1.1bn in 2011. Insurance amounts to approximately $635m per year and up to $680m is spent on re-routing vessels.

According to a caustic soda trader, arming a vessel can cost as much as $60,000–100,000/day.

These additional expenses mount up and, as a result, freight costs have increased by as much as 40% in 2012. Some sources estimate they have nearly doubled since last year.

"I have lost business just this month because of piracy. My customers in Kenya cannot afford to pay all the premiums and extra charges involved with getting my goods from India to Kenya, so they cancelled the orders," said an Indian caustic soda exporter.

Businesses in eastern African have been particularly badly hit because shipping companies tend to avoid ports along the eastern coast of the continent, or only enter them if high piracy premiums are paid and if vessels are protected by armed guards.

"Five of our ships were hijacked last year. The latest cost us nearly $6m in ransom money," a Kenyan caustic soda buyer told ICIS.

Over the past five years ransoms paid to Somali pirates have increased from an average of $150,000 in 2005 to $5.4 million in 2010, OEF said.

"Eventually we get the ransom back from our insurance firm but they then increase insurance and piracy premiums, so we are back at square one," the buyer added.

The average cost of insuring a vessel has gone up from $70,000 per voyage in 2011 to about $100,000 per voyage in 2012, ICIS data shows.

The cost increases are not limited to exporters and buyers. Businesses affected by piracy need to pass on these added costs to their customers, namely consumers.

A soap and detergent manufacturer in eastern Africa said it had increased its end-product prices 5% last year because of piracy.

The latest report by OEF estimates that the total cost of piracy to the world economy in 2011 was between $6.6 billion and $6.9 billion.

To tackle this problem, many governments have organized special task forces to guard piracy infested coastlines. The latest addition to these measures is the creation of an international task force on pirate ransoms by the British Foreign and Commonwealth Office (FCO) on 23 February.

"The new task force will bring together experts from across the world to better understand the ransom business cycle and how to break it. We will be working with international partners over the coming weeks to set out the structure and approach of the Task Force," an FCO statement said.

The news came after many of the world’s largest shipping companies, including Maersk, announced huge losses due to high fuel prices, higher construction costs, piracy premiums and other related expenses.

Shipping companies are now expected to increase freight costs to claw back their losses.

"A lot of businesses have become unviable or straddled with high costs [because of piracy,]" an Indian exporter said.

The biggest problem is that most of the areas where piracy is thriving are lawless or war-torn regions, which means prosecution of pirates is nearly impossible.

For example, countries like Somalia, Sudan, Yemen and Ethiopia, off the coasts of which most pirate attacks occur, have experienced conflict for decades, ruling out any attempt to rein in piracy.

According to the International Chamber of Commerce's Commercial Crime Service's (CCS) section, 275 of the 439 attacks reported to the International Maritime Bureau (IMB) in 2011 took place off Somalia on the east coast of Africa and in the Gulf of Guinea on the west coast of Africa.

Security forces seem to have had a positive impact along the coastline. A top official with the European Naval Force Somalia (EU NAVFOR) this week said that more pirate attacks off the Horn of Africa have been thwarted as a result of stronger security measures.

“There are currently eight ships pirated, with 213 personnel held hostage [off the Horn of Africa] – these numbers are historically low,” said Captain Philip Haslam, chief of staff for EU NAVFOR.

However, Haslam said there are still areas for development. The legal system needs to be improved so that more seafarers give witness testimonies, which would likely result in an increase in prosecution rates.

"What we would like is for piracy to completely disappear from our coasts because this is simply crippling us, killing our business," said an eastern African buyer.

Follow Janos Gal on Twitter for tweets on the caustic soda (Africa) market

($1 = €0.76)

 

By: Janos Gal
+44 208 652 3214

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