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Cost of piracy: A comparative voyage approach

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Maritime Economics & Logistics Aims and scope

Abstract

The seizure by Somali pirates of the Saudi-owned VLCC, the Sirius Star, with its crew, in November 2008, captured international attention. Across the world, regular updates were given and the ransom demands discussed and debated in the press. Dramatic footage was shown on national television of the payment of the ransom by parachute and footage of the debacle which followed where some of the pirates were drowned. Until then, most of the non-shipping world thought of pirates as the romantic buccaneers aka Hollywood. However, the cost of piracy to industry and its impact on international trade cannot be ignored. There are potential geopolitical repercussions. Despite international efforts, piracy in this region threatens to put a chokehold on one of the world's busiest shipping arteries. Shipping lines are taking decisions to avoid the area, rerouting via the Cape of Good Hope. This article provides a methodology to measure the costs of piracy from the shipping company's perspective by taking a comparative voyage costing approach.

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Notes

  1. Four Resolutions were passed during 2008 in an attempt to reduce the growing number of pirate attacks in the Gulf of Aden and give more legitimacy for the Navies operating in the area to protect vessels and apprehend pirates. UN Resolution 1846, passed on 2 December 2008 permits States and regional organisations cooperating with the Somali Transitional Federal Government (TFG) to enter Somali territorial waters and use ‘all necessary means’ such as deploying naval vessels and military aircraft, as well as seizing and disposing of boats vessels, arms and related equipment used for piracy … to fight piracy and armed robbery of the sea off the Somali coast, in accordance with relevant international law.

  2. A privateer was an armed vessel sanctioned by a State and authorised to capture the merchant vessel of a hostile nation. Privateering invariably flourished during time of war but degenerated into piracy when peace was declared (Cordingly, 2006).

  3. The MV Faina, a Ukrainian freighter was captured in September 2008 with a cargo of Soviet-era tanks and other heavy weapons bound for Southern Sudan with the connivance of the Kenyan government (The Economist, 2008a, 2008b). Many believe the action was engineered by the ICU, Islamic Courts Union (Hanson, 2009).

  4. See discussion in Munich Re (2006).

  5. There is fear that there could be a repeat of a pirate hijacking incident in the Malacca Strait. In 1992 a collision occurred between the containership ‘Ocean Blessing’ and a hijacked tanker ‘Nagasaki Spirit’ taking the lives of all but two of both ship's crew. Pirates boarded the tanker, imprisoned the crew and set the auto pilot at full speed. The fire lasted for six days on tanker and six weeks on the container ship (Law Lords, 1997).

  6. In late September 2008 an Iranian ship on route from China was boarded by pirates. Some pirates died while others experienced sickness, hair loss or suffered burns, leading to speculation of chemical or radioactive cargo (Abrams, 2008).

  7. Peter Bond GM of Cyprus-based Interoient Line Services reports that the company pays its crews double for every day spent in the Gulf of Aden. They are also considering hiring licensed security guards, costing $60 000 per trip to protect the crew (Miller, 2008).

  8. For more detail on fuel consumption calculations, see (Bendall, 1979).

  9. An assumption is made that customers will not demand a lower freight rate for slower delivery of goods.

  10. Container cargoes are more time sensitive so chartering in extra tonnage would be the better solution commercially, particularly in relation to the inventory cost of delayed delivery times.

  11. There may be some impact on inventory and other holding costs for the container operation. See previous footnote.

  12. If a shipowner chooses not to extend the number of voyages but completes the freight task in time T, an extra vessel could be chartered in, incurring a similar cost.

  13. In this analysis only port pairs were used to demonstrate the methodology. If more port calls are added, the number of round voyages per year and thus the number of TEUs carried would decrease. Shipowners can adjust the analysis in line with their own port scheduling.

  14. Marcus John, CEO Thomas Miller, Australia. Personal communication 26 February 2009.

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Authors and Affiliations

  1. Finance and Accounting, Macquarie University, North Ryde, Sydney, 2109, N.S.W., Australia

    Helen B Bendall

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  1. Helen B Bendall
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This article is being used as a background briefing paper in the Australian Government Ministerial Enquiry into Maritime Piracy. The methodology has been verified by BIMCO and other industry authorities.

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Bendall, H. Cost of piracy: A comparative voyage approach. Marit Econ Logist 12, 178–195 (2010). https://doi.org/10.1057/mel.2010.1

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