Economic Effects of Pirate Attacks

Monday, December 01, 2008

McQuilling Services, LLC, marine transport advisors, released a message addressing the economic impact of pirate attacks on tankers.

“The recent pirate attack on the VLCC Sirius Star – 319,430 dwt built 2008 – that took place offshore Kenyan coast, has implied a new magnitude of possible security impacts on the tanker shipping markets. An increasing threat from the Somali pirates is present in that region and the additional insurance premiums are being paid by the ship owners in order to transit the dangerous waters. However, the attack on Sirius Star stands-out from the rest because of the sheer size and value of the hijacked vessel which may propel various short term changes in the tanker marketplace in the near future.

From an economic standpoint, the Sirius Star earned around US $47,000 / day in TCE earnings at the time of hijacking. Having been in captivity for ten days, the total vessel revenue loss so far is around US $470,000 in TCE earnings. More importantly, it has been reported that the ransom amount requested from the owners is as high as US $25 million. If we take that number conservatively and assume that the negotiation will start at US $15 million, it still represents an equivalent of over 450 days of vessel revenue based on the VLCC earnings in today’s marketplace.

Therefore, in addition to the security threat and interruption of vessel’s trade, the hijacking of the Sirius Star sends a message to the shipping community that the modern-day pirate attacks can also carry a substantial unplanned out of pocket expense. The physical value of the hijacked MT Sirius Star is estimated at about US $256 million, including ship’s value, cargo value and the value of bunkers on board. Given the fact that such a high-value asset can be relatively easily hijacked in the middle of the ocean, the owners are beginning to take precautionary measures in order to protect their vessels, crew and cargo from the modern-day pirates.

In effort to avoid the pirate infested waters, an increasing number of ship owners are altering their respective fleets from the traditional trading routes. The two specific areas that are presently being avoided are the Gulf of Aden and the coastal waters of East Africa. When avoiding the Gulf of Aden en-route to Europe via the Suez Canal, vessels have to sail around the Cape of Good Hope and extend their voyage on average by twenty days to reach the Western destinations. Vessels avoiding only the East African coast may extend their voyage by approximately two days en-route to the US Gulf region. Therefore, as more vessels begin to avoid the area, an imminent impact on the voyage days and cargo delivery times can be expected to take place.

The result of extended voyage days has a direct impact on the fleet’s supply picture and consequently on freight rates. Longer voyages absorb more tonnage from the marketplace and cause the supply of vessels to shrink. When that occurs, the window of opportunity opens for the owners to obtain higher freight rates and cause the markets to increase.”


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