Dubai: The cost of GCC household goods may be on the rise as shipping companies pass along to consumers a 300-fold increase in emergency insurance premiums - per voyage - to ply pirate-infested waters, experts say.
A rash of attacks on bulk carrier ships by rocket-toting Somali pirates has prompted London insurance authorities to list the eastern coastal areas of the Arab peninsula as ‘War Risk' zones, prompting some marine underwriters to boost their insurance coverage from $500 (Dh1,836) per voyage to GCC countries up to $150,000 per trip by some accounts.
Gulf countries such as the UAE are highly dependent on the daily shipments of perishable foods, electronics, clothing and household goods from Europe and Asia and are vulnerable to the trickle-down effects of higher shipping costs.
The UAE alone received Dh485.4 billion in imports in 2010 which translated into roughly 318,000 tonnes per day entering the country, according to the Federal Customs Authority.
Anna Bowden, programme manager of One Earth Future, said that new emergency surcharges imposed by insurance companies on ships traversing the listed war-risk zones of the Indian Ocean, Arabian Sea and Gulf of Oman will push the prices of goods higher.
Emergency surcharges
"Emergency surcharges do get passed along," Bowden told Gulf News from the Louisville, Colorado offices of One Earth Future. "It does certainly go down the supply chain. The consumers pay a little more."
Bowden, co-author of Oceans Beyond Piracy report, estimates that piracy is costing the international community from $7 billion to $12 billion a year.
Research so far by Bowden suggests that the added cost per item shipped due to added insurance surcharges — a kind of pirate ocean toll — varies widely "anywhere from two cents to a dollar more".
There is no avoiding the shipping surcharges because any "ship that travels through a war zone… has to have war risk cover".
In the Oceans Beyond Piracy report, Bowden noted that "the cost of war-risk premiums has increased 300-fold from $500 per ship, per voyage; to up to $150,000 per ship, per voyage in 2010."
Cargo insurance, the report noted, has also shot up $25 to $100 per container while it's been estimated "that piracy has doubled the cost of hull insurance".
In 2010, Bowden estimates in the report that insurance premiums to protect ships and cargo from Somali pirates ranged from $460 million to $3.2 billion.
An estimated 30,000 ships transit the Gulf of Aden every year.
Further estimates in the report suggest that shipping companies pay an additional $363 million to $2.5 billion a year — or $134,000 for each ship on each voyage — to protect the ship using security guards ($80,000), electric fences ($40,000) and barbed or razor wire ($12,000).
To make matters worse, Bowden noted that ransoms paid out by shipping companies are growing at a phenomenal rate over years past in order to secure the release of ship, crew and cargo.
"In November 2010, the highest ransom on record, $9.5 million, was paid to Somali pirates to release the Samho Dream, a South Korean oil tanker," Bowden wrote in the report.
The 300,000-tonne supertanker was hijacked in April last year, carrying an estimated $170 million worth of crude oil owned by American refiner Valero Energy, was en route to the United States from Iraq. The pirates managed to outrun a South Korean Navy destroyer which pursued the tanker.
The Samho Dream is now lying temporarily abandoned in Dubai waters after Dubai authorities reported last week that the supertanker's owners, Samho Shipping, had filed for bankruptcy and that efforts were under way to return the ship to its home country. A sister tanker Samho Crown is also reportedly stranded in Dubai waters.
Bowden said higher ransom demands are being met by ship owners year on year.
"In 2005, ransoms averaged around $150,000. By 2009, the average ransom was around $3.4 million. In 2010, ransoms are predicted to average around $5.4 million."
There were 52 successful hijackings in 2009 resulting in $177 million in total ransoms paid to Somali pirates. In 2010, although the number of hijackings dropped to 44, total ransoms paid rose to $238 million.
Crews that are hijacked and imprisoned in Somalia now face three to four months in captivity as negotiations take longer to settle before a ship is released.
Downtime costs
Downtime for ships out of service after a hijacking also cost shipping companies even more money, Bowden said in the report, with estimates that it costs "around $3 million for a cargo ship to be held for two months at a charter hire of $50,000 per day."
While the report offers numbers, Bowden notes that the cost of piracy in the report is "not a definitive figure, but rather intended to be continually developed, adapted and improved."
Neil Roberts, senior executive — underwriting at Lloyds Market Association, told Gulf News from London that some figures seem a little off.
"The global hull premium, according to International Union of Marine Insurance (IUMI) statistics, is $6.6 billion — OBP [Oceans Beyond Piracy] reckoned war premiums alone were $4.5 billion which is simply unrealistic. Additionally, the war market is exceptionally competitive and discounts of 50 per cent for no claims are usual. Further discounts are given for what many would argue is common-sense security," Roberts said.
"It is very difficult to give exact numbers but the best estimate — as we told the House of Commons inquiry — is that losses certainly exceed premiums and relevant premiums were estimated at £110 million (Dh660.30 million) for UK. Interestingly, the cost of naval support far outweighs any premiums and losses."
FP Marine Risks states that any vessel sailing into a war risk area must discuss additional insurance premiums with their underwriters within 48 hours of entering the zone as identified by the Joint War Committee in London, a body that represents insurers such as Lloyd's of London. The committee decided in December 2010 to add the Arabian Sea and Gulf of Oman to the JWC's Hull War, Strikes, Terrorism and Related Perils list.
Yudhishthir D. Khatau, managing director of Varun Shipping, told Bloomberg in June that his company is shelling out an additional $70,000 per voyage for each ship in a fleet of 16 that transports goods between the Middle East and India.
"The extra cost is harming us very seriously," he said.
Outlaws extend operations
Latest numbers released by the International Maritime Bureau's (IMB) Piracy Reporting Centre suggest that while attacks along the Somalia coast have dropped, the decline may be at the expense of other coastal regions nearby in Arab waters.
A live piracy map provided by the IMB on its website shows that the lion's share of reports of hijackings, attacks and suspicious ships are being recorded along the Omani coastline and hundreds of kilometres into the open seas of the Indian Ocean.
Using larger mother ships and smaller skiffs to attack slower-moving bulk carriers, pirates are spreading their tentacles into open waters where they can visit harm upon victim ships away from the patrolling military ships of two combined international navy task forces.
In the Arabian Sea and off Oman, the IMB said increasing incidents in that area are "believed to be Somali pirates extending their attack areas".
To date this year, the IMB reports there have been 178 pirate attacks in the region, 22 of which resulted in hijackings. Seven crew members were killed and 362 sailors have been taken hostage.
An IMB report released last month suggested that two-thirds of 266 pirate attacks globally so far this year were carried out by Somali pirates.
"In the last six months, Somali pirates attack more vessels than ever before and they're taking higher risks," Pottengal Mukundan, IMB director, said in a statement, adding that "many of the attacks have been east and northeast of the Gulf of Aden, an area frequented by crude oil tankers sailing from the Arabian Gulf as well as other traffic sailing into the Gulf of Aden."
One of the most recent attacks near Arabian Gulf waters transpired on August 20 when pirates boarded the Fairchem Bogey within three kilometres of the Omani port of Salalah, weighed anchor, and disappeared.
The EU's naval force (Eunavfor) confirmed the hijacking, noting the ship, a Marshall Islands chemical tanker of 52,455 tonnes with 21 hands aboard, was taken to the Somali coast.
Riad Kahwaji, founder and CEO of the Institute for Near East and Gulf Military Analysis based in Dubai, said tens of millions of dollars in ransoms may be helping Somali pirates create a sophisticated intelligence network that is helping them expand their reach.
"To go this close to the shore of Oman when there are at least two task forces, this shows boldness and confidence," Kahwaji told Gulf News. "Obviously, there are people on shore providing them [pirates] with intell."
A superior underground information pipeline would explain why "dozens of destroyers, corvettes and patrols in the Gulf of Aden and seas off Oman are not able to pick them up," he said. "There is serious intelligence failure on behalf of the alliance forces."
Paid informants on shore, Kahwaji speculated, are feeding the pirate network with real-time data detailing the manifests of ships, departure times and even the intended destinations of commercial vessels. Pirates, he said, "are getting a lot of intelligence to help them do what they want. There is enough money to build a sophisticated system of control."
To defeat the pirates, Kahwaji said authorities need to strike the central nervous system of the pirates.
"You have to have counter-intelligence, a serious joint effort," he said. "They need to track the chain of intell and see how it is moving, then take it out."
UAE spares no effort
Authorities in the UAE have done more than just talk about crushing the growing tide of piracy in Arab waters.
The UAE has taken a hardline approach against piracy in recent months through military action, a pledge of financial support and front line negotiations for the release of a UAE-owned oil tanker.
"The UAE has done quite a bit. It is the only country here [in the GCC] to rescue a hijacked ship," said Riad Kahwaji, founder and CEO of the Institute for Near East and Gulf Military Analysis.
In early April, Emirati military forces bested pirates after the hijacking of the Arrilah-1, a 37,000-tonne bulk carrier under the ownership of government-operated Abu Dhabi National Tanker.
"The operation was carried out in a very professional manner. It was quick, accurate and decisive with no causalities or damage to property," Lt Col Abdullah Al Dhaheri of the UAE Armed Forces told WAM at the time.
Ten Somali pirates were taken into custody to face prosecution.
Two weeks later, Shaikh Abdullah Bin Zayed Al Nahyan, UAE Foreign Minister, told delegates at an Abu Dhabi counter-piracy conference that the Emirates would donate $1 million (Dh3.67 million) to a UN fund to fight piracy.
More recently, the UAE's National Transport Authority (NTA) confirmed that UAE oil tanker Jubba XX — hijacked July 16 in Yemen waters — was released July 27 by pirates off the coast of Somalia and that its crew members were safe.
The NTA said, "Shaikh Hamdan Bin Mubarak Al Nahyan, Minister of Public Works and Chairman of the National Transport Authority, issued his directives to follow up the Jubba XX kidnapping; ensure the safety of its crew; and communicate with its owners."
Owned by Sharjah-based Jubba General Trading Company, the ship was released by pirates, the NTA said in a statement, "without any concessions or payments due to the good reputation of the UAE and its cordial relations with all countries."
Somali pirate attacks to date
- 178 Total incidents
- 22 Total hijackings
- 362 Hostages
- 7 Crew members killed
- 18 Vessels still held by pirates
SOURCE: International Maritime Bureau (IMB)
