The ending of the monsoon has focused increased attention on the piracy issue and thus also the costs of piracy.
The ending of the monsoon has focused increased attention on the piracy issue and thus also the costs of piracy. If you effectively want to reduce the risk of getting your vessel captured by pirates you have to consider the option of going round the southern tip of Africa, Cape of Good Hope.
This updated cost-side analysis from BIMCO estimates the costs under the current market conditions and gives food for thought on voyage planning when considering the troubled waters in the Gulf of Aden and the waters surrounding the Horn of Africa as well as the costs incurred in transiting the Suez Canal. The overall conclusion is very clear. The piracy issue is very costly to the shipping industry. An owner of a Post-Panamax container ship will loose USD 2.4 million while an owner of a Very Large Crude Carrier (VLCC) will loose as much as USD 7.0 million per annum in order to avoid the pirates in the Gulf of Aden by sailing round the Cape instead.
Industry sources tell of vessels taking the long way round the Cape at the request of either owner or charterer wanting to avoid the vessel being captured. A lot of money is at stake if you neglect the risk of piracy, so the cheapest way in the short term could end up landing you in the worst situation of all should your vessel get attacked and subsequently captured by pirates.
It should be noted that the analysis has taken into account that a fully laden VLCC cannot go through the Suez Canal without a partial discharging of cargo to the Sumed Pipeline at Ain Sukhna Terminal in the Rea Sea before picking up an equivalent shipment at Sidi Kerir Terminal on the Mediterranean Coast.
BIMCO has developed an Excel-based cost calculator to be used as information tool only that is available in Excel format. The cost analysis presented in this article is based on this calculator, and it assumes that the same amount of cargo has to be transported in the same amount of time. The tool can be used as it is or can be customized to encompass the issues relevant for the individual user. The calculations are not simple and you need to input more than 20 numbers to make the estimations on the cost of piracy when using the tool. For simplicity it is assumed that the transport takes place without any other port calls than the port of departure and the final destination. All the details and assumptions are readily available in the Excel-based cost calculator.
What matters the most in the cost calculations?
For a liner company it is primarily a question of higher bunker expenses due to the large consumption of fuel oil for the very powerful engine, while a tanker company primarily is concerned with the added capacity costs even though the fuel consumption also plays a significant part. In the current market conditions a lot of shipping companies turn to slow steaming of the vessels, some even do super slow steaming which reduces the use of fuel by as much as 30% and thus make a demand for extra vessels to enter the trading service. However, that issue is beyond the scope of this article.
If you simply consider the bare distances of a voyage from the Arabian Gulf or Singapore to Rotterdam, transiting via the Suez Canal makes sense every time. By going via the Cape, a VLCC trading crude oil from the Arabian Gulf (Ras Tanura) to Europe (Rotterdam) adds 74% extra miles to its voyage, while a Post-Panamax (PPMX) container ship trading from Singapore to Europe adds 42% extra nautical miles to the voyage from Singapore to Europe.
The costs incurred from going round the Cape is primarily related to the extra fuel consumption but also to the extra capacity required and related insurance premium increase in order to lift the same quantum of cargo in the same amount of time. Conversely, the costs incurred in going through the Suez Canal primarily consist of canal tolls, extra insurance risk premium and the use of services such as tugs, pilotage and mooring. Canal costs have increased by 3% over the last the 4 months.
Depressed markets and high bunker prices hits liner owners
2009 has seen bunker prices more than doubled and freight rates halved. This toxic combination of low freight markets and high bunker prices provides an incentive for container owners to proceed with business as usual and direct their vessels via the Suez Canal. It goes without saying, that such a business environment is costly. In the current situation the liner company is left with two bad options. For economic reasons the choice should be the least costly option of the two, which is going via the Suez Canal despite terrible freight market conditions and the risk of getting attacked by pirates.
Stringent economic thinking in the liner business
Due to the surging bunker prices, the calculus for a 10,000 TEU PPMX container vessel has recently reversed; from favoring the route round the Cape when bunker prices were lower, container owners have now reverted to the customary procedure of transiting the Suez Canal. The break-even level for the fuel, in current freight markets, is calculated to be around USD 390/tonnes. If bunker prices were to stay below this level it would make economic sense in the current market to redirect your container vessels to go round the Cape. Half a year ago the break even bunker price stood at USD 360/tones, but surge in Canal tolls have pushed this number upwards.
The amount of fuel consumed at service speed for a large container vessel makes the bunker price the most significant variable to consider. With freight markets currently very low, the extra capacity costs you have to consider are of lower significance. In the current market, with bunker prices around USD 460/tonnes, a container vessel owner would loose USD 2.4 mill per annum by transporting the same quantum of containers in the same amount of time round the Cape as compared to going via the Suez Canal. These costs are calculated under the assumption that the longer delivery time is accepted by customers. On the benefit side a voyage round the Cape would also reduce the risk of piracy, even though this is a relatively small risk when sailing at a service speed of 25 knots with a high freeboard.
Having made these calculations, it is worthwhile noticing that slow steaming and super slow steaming have made its toll on the market and also changed the calculations of the individual owner/charterer. The calculator is made to be able to recalculate the conditions at hand.
Preventive measures to be taken by vessels at sea
The considerations are different when looking at a VLCC, which has a slower service speed and a lower freeboard, as well as comparably less burdensome bunker oil consumption, even though
115 tonnes/day is still considerable. Here the consideration is more a question of escaping the very real dangers of piracy attacks. In line with BIMCO’s advice on preventive measures to be taken by vessels at sea, the crews of slower ships with a low freeboard should be particularly vigilant and all masters are advised to have double watches and to have the radar and radio continually manned during navigation in dangerous seas. When adhering to “Best Management Practices to deter piracy in the Gulf of Aden and off the coast of Somalia” owners, managers, operators and Masters of vessels transiting the Gulf of Aden will be prepared in the best possible way in order to counter piracy.
Furthermore BIMCO has developed the AVRA – Automated Voyage Risk Assessment service. AVRA is the BIMCO – AEGIS - IMB collaborative web-based Automated Voyage Risk Assessment service which gives an assessment of all the current threats to merchant ships at sea and in ports across the globe, with risk analysis provided by AEGIS Defence Services Ltd (permanent advisors to Lloyds Joint War Committee). It generates specific threat assessments for an individual vessel making a voyage anywhere in the world and provides a Port Only facility that can be used purely to investigate the risk to a particular vessel at a specific port. AVRA is available directly from www.bimco.org.
Significant cost issue due to needed extra capacity
One-year time charter rates for a VLCC are currently at around USD 30,000 a day after having slipped continuously throughout 2009, although in absolute terms this particular market is not hit as hard as the container market. However, this does mean that the opportunity costs for the extra capacity needed to use the trading route around the Cape is of far more significance to the VLCC owner than for the liner company. The longer sailing distance combined with a speed of only 15 knots, the ratio of extra capacity needed to fulfill the equivalent cargo commitments via the Cape is 50% for the VLCC. The corresponding figure for the PPMX-container vessel is only 28%.
No real economic incentive for the VLCC in current markets
Under the current market circumstances and given the model assumptions, the analysis for a 318,000 DWT VLCC reveals that if freight markets were to tumble dramatically to USD 10,000 a day, the insurance risk premium per transit via the Suez Canal through the Gulf of Aden would have to triple before it would make economic sense to go round the Cape.
The calculus of a dry bulk vessel
When considering the costs of routing a dry bulk vessel round the Cape as an alternative to going via the troubled waters around the Horn of Africa, the conclusions are less straight forward, simply because the tramp business is a totally different ball game. Being an unscheduled service, tramp operations are simply not comparable to the regular or scheduled routes plied by a container liner company or a VLCC owner.
However, digging deeper in the evaluation of the economic pros and cons of a Panamax voyage charter with coal going from Australia (Newcastle) to Europe (Rotterdam), one can see that the distances do not in fact differ much and the Suez Canal transit fee for a Panamax dry bulker is just around half the amount paid for a VLCC or a container ship. At the end of the day, what really matters for the dry bulk owner is not the extra bunkers needed for sailing the added distance, the Suez Canal toll discounts or the operational expenditures; rather, it is the level of the freight market - or in other words, the revenue from the trip - that is crucial for his voyage planning. So when the market is at its lowest there is money to be made or costs to be saved by avoiding the Suez Canal - as long as the cargo owner accept a longer delivery time of around a week.
The overall conclusion is very clear. The piracy issue is very costly to the shipping industry. Try to imagine if the 40,000 vessels transiting the Suez Canal every year should be rerouted round the Cape. Certainly a lot of extra tonnage would be needed, but also a lot of extra fuel. Added costs to an owner of a Post-Panamax container ship would be USD 2.4 million while a VLCC owner will loose as much as USD 7.0 million. per annum in order to avoid the pirate-infested waters around the Horn of Africa by sailing round the Cape instead.
Contact: Peter Sand, Shipping Analyst for more information firstname.lastname@example.org
Did you know that?
After many months of careful development work and consultation BIMCO has published three new Piracy Clauses. The suite of clauses consist of a revision of the Piracy Clause for Time Charter Parties, first issued in March 2009, plus two newly developed Piracy Clauses – one for single voyage charter parties and one for consecutive voyage charter parties and contracts of affreightment. The Time Charter Party version of the Piracy Clause has been revised in response to industry comments that the responsibilities and liabilities of the parties in the event of the seizure of the vessel by pirates were perceived as being imbalanced. The two new Clauses provide contractual solutions for short term spot fixtures where the cost and risk remain with the owners, and also for longer term consecutive voyages and COAs where risk and cost is shared between the owners and the charterers.
All three Piracy Clauses have been issued in the form of Special Circulars providing background and explanatory notes – the Special Circulars can be downloaded using the following link:
BIMCO Special Circulars – Piracy Clauses