Shipping at risk

A new UNCTAD report examines the economic costs and trade-related implications of maritime piracy across the world

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The importance of oceans and seas for trade-led economic prosperity has increased in tandem with growth in the world economy, global merchandise trade and maritime transport activity. However, increased international trade volumes and value have also heightened the exposure and vulnerability of international shipping as a potential target for piracy, armed robbery and other crimes.

According to a new two-part report published by UNCTAD titled ‘Maritime Piracy,’ over 2006-2010, piracy incidents rose by 86.2% worldwide, with the number of actual and attempted attacks moving up from 239 in 2006 to 445 in 2010. Between 2005 and 2012, 61 seafarers were killed as a result of piracy and 5,420 were held hostage on some 279 ships hijacked worldwide. Piracy off the coast of Somalia accounted for nearly 50% of all the hijackings over this period.

In fact, pirates off the coast of Somalia have, since 2000, adopted a different approach by widening their geographical presence and moving farther away from the coast and territorial waters into the Indian Ocean, the Red Sea, the Gulf of Oman, the Mozambique Channel, Maldives, and the Indian territorial waters.

According to the report, while intensified international counter-piracy efforts have since contributed to a reduction in the number of incidents in the region, this positive trend remains fragile and could be undermined and reversed unexpectedly. In addition, with a surge in piracy observed in the Gulf of Guinea, West African waters are also emerging as a dangerous hotspot for piracy.

Tankers, containerships and bulk carriers remain among the main targets owing to their high economic value and given their strategic role in global merchandise and energy trade.

In 2013, the World Bank had estimated the global economic cost of piracy off the coast of Somalia at $18bn, with a margin of error of roughly $6bn. The One Earth Future (OEF) Foundation estimated the total cost of piracy off the coast of Somalia at $5.7–$6.1bn in 2012. While over 80% of these costs were estimated to be borne by the shipping industry, 20% were estimated to be borne by governments. These costs act as a hidden tax on world trade reflected in increased trade costs.

Attacks in the Gulf of Guinea region are also on the increase, in many cases exhibiting greater levels of violence. In contrast to the modus operandi adopted by Somali pirates – holding ships and crews for ransom – pirates in the Gulf of Guinea region appear to be focused on stealing the ship’s cargo, especially crude oil and oil products, for subsequent resale on the black market, with little regard for the life of crew members.

While piracy is not a new insured risk, the increase in pirate attacks has affected premiums and coverage. Since the Gulf of Aden was classified as a war risk area by the Lloyd’s Market Association (LMA) in May 2008, the cost of war risk premiums has increased significantly, from $500 per ship, per voyage to up to $150,000 per ship, per voyage, in 2010. The additional premiums paid on cargo transiting piracy regions are estimated to have increased by $25 to $100 per container in the past few years. The cost for hull insurance which covers physical damage to the ship has also increased and is estimated to have doubled in 2010.

It is estimated that the shipping industry pays around $2.3-$3bn per year to reroute ships to avoid piracy each year. Diverting fleet and trade from the Suez Canal to the Cape of Good Hope on a trip from the Middle East to Europe doubles the typical transport time.

Industry under threat
As many countries in regions affected by piracy are also major hydrocarbon producers and suppliers of global energy markets, maritime piracy affects the oil industry and tanker trade, as well as energy security.
According to the UNCTAD Report, piracy attacks off the coast of Somalia threaten the oil industry in the region, such as in Bahrain, the Islamic Republic of Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Yemen. With nearly 45% of global crude oil production being carried in tankers, well-functioning and secure strategic transit points such as the Gulf of Aden are critical for global energy supply and security.

With oil cargo passing through the Strait of Hormuz estimated to account for some 35% of all seaborne oil traded in 2011, the strategic importance of the maritime route involving the passage through the Strait of Hormuz and the Gulf of Aden/Suez Canal cannot be overstated. The stakes are further amplified by growing volumes of Liquefied Natural Gas (LNG) being loaded at ports in Qatar, a country that accounted for nearly one third of global LNG exports in 2012.
Approximately 30% of piracy attacks between 2008 and 2012 have targeted bulk carriers and general cargo ships. As bulkers carry the majority of the world’s food staples such as rice and grain, pirate attacks have direct consequences on the price of food given the delays in delivery and the loss of cargo in the case of perishable goods. Rapid rises in food prices can have dire humanitarian consequences, but may also lead to social unrest, riots and conflict.

Piracy also poses additional risks, for instance in terms of the potential for pollution, which in turn may have severe economic as well as environmental effects and in terms of jeopardising economic and development opportunities arising from the installation of submarine cables. Also worth noting is the fact that piracy hampers the collection of weather and climate related data which are required for the purposes of safe navigation and for the study of climate variability and change.

Addressing the challenge
Maritime piracy has evolved from a localised maritime transport concern into a cross sectoral global challenge, with a range of important repercussions for the development prospects of affected regional economies as well as for global trade. Addressing the challenge in an effective manner requires strong cooperation at the political, economic, legal, diplomatic and military levels, as well as collaboration between diverse public and private sector stakeholders across regions. While progress will ultimately also depend on the economic situation and on political stability in affected regions, the success of policies and strategies to combat and repress piracy rests on strengthened cooperation at all levels. This includes cooperation not only in respect of maritime security measures, but also in terms of information sharing and in terms of the effective prosecution of pirates and of those who benefit from the proceeds of piracy.

Reflecting an increase in cooperation at the international and regional levels, a broad range of multilateral initiatives have been developed over recent years with the objective of countering piracy and armed robbery at sea. Many of these were initiated following the proliferation of acts of piracy off the coast of Somalia, but now serve as a model and/or as a basis for relevant cooperation in other regions, such as in West African waters, where piracy levels are rising at an alarming rate.

Also worth noting are initiatives by the shipping industry, including the development of Best Management Practices to Deter Piracy off the Coast of Somalia and in the Arabian Sea Area (BMP) which set out preventive, evasive and defensive measures, as well as the increasing use of armed guards and security personnel on board ships.

While the main focus of the international community’s response has been and continues to be on piracy off the coast of Somalia, it is hoped that the ambit of relevant initiatives and efforts will, in due course, be extended to all areas where maritime piracy is prevalent, so as to minimise the incidence of piracy, as well as its human and economic costs and its wide-ranging implications for international transport, trade and security.

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