Somali pirate threat diverting grains shipments

Grains shipments are being diverted around Africa as Somali pirate gangs strike deeper at sea increasing journey times and potentially lifting insurance costs at a time of unrest over food prices.

Pirates operating off the Horn of Africa are threatening traffic aiming for the vital Gulf of Aden trade route, either from Asia towards Europe and the Middle East Gulf or from the United States and Europe heading towards Asia.

While wheat shipments from Australia, one of the world's biggest exporters, were expected to accelerate shortly as the new export drive gathers pace, a trade source said sellers could find it harder to find vessels willing to make the journey through the Gulf of Aden to Middle Eastern buyers. A wheat cargo from Australia to Saudi Arabia this month cost an additional $10,000 a day due to the higher risk, Reuters reports.

"You have to find an owner who is willing to put his ship at risk for which there will probably be an insurance premium and higher costs," the source said. "If freight costs spike, it could hurt."

The source said Australian canola shipments to European markets were being diverted around the Cape of Good Hope in South Africa, which was adding 10-12 days extra journey time.

THREAT RESPONSE

Responding to the growing threat, London's marine insurance market last month expanded the stretch of waterways deemed high risk from seaborne raiders to include the Gulf of Oman and a wider stretch of the Indian Ocean.

Pirates are making tens of millions of dollars in ransoms and despite successful efforts to quell attacks in the Gulf of Aden, international naval forces have struggled to contain piracy in the Indian Ocean owing to the vast distances involved.

"Many crews are having to run the gauntlet of small arms attacks that are endangering their lives and the safe passage of world trade," said Peter Hinchliffe, secretary general of the International Chamber of Shipping, which represents about 80 percent of the global industry.

Trade sources said grains shipments from European and US exporters to key buyers in the Middle East were also being re-routed around the Cape rather than run the risk of passing through the Gulf of Aden via the Suez Canal. 

"There is obviously extra voyage time involved but the lower freight costs are cushioning the impact. The dangers of having a ship hijacked are very large," a major European exporter said.

Grains markets are increasingly sensitive to potential disruptions as adverse weather patterns have raised concern over global supplies at a time of growing unrest over food inflation.

Food price protests sweeping across North Africa and the Middle East reached Jordan on Friday, following disorder in Algeria and Tunisia which has had many countries in the region moving to cut food prices and food taxes.

The Baltic Exchange's main sea freight index .BADI, which tracks rates to ship dry commodities, has tumbled to its lowest in nearly two years hit by a glut of vessels seeking employment.

The cost of hiring a panamax vessel, especially used to transport grains, on a 4 to 6 month time charter contract was estimated at US$14,500 to US$15,500 a day, around US$4,000 a day lower than a year ago. Nevertheless, some shippers were resigned to having to stump up higher costs due to a lack of any solution at present.

One of Australia's largest grain shippers CBH Group said it was still shipping through the risk area. "Premiums are being factored in. So it's just one of those things that has to be taken account of," a spokeswoman said.

FRUSTRATION GROWING

Security analysts said the move by underwriters to widen the piracy risk zone was set to have a bigger impact on shipping, although any premium rises would depend on what risk mitigation procedures were in place such as crew training and watch rotas.

"The extension should be seen as an official warning for the business community that piracy is spreading very far eastwards," said John Drake, senior risk consultant with AKE Ltd.

"By using 'motherships' the pirates are able to travel much further out to sea because they can transport larger supplies of fuel, food and water." 

Maritime piracy costs the global economy between $7 and $12 billion a year with Somali piracy in particular driving up the cost of shipping through the Indian Ocean, researchers say. Frustration is also mounting among seafarers who have found themselves in the firing line, with more than 600 mariners held hostage by pirate gangs in Somalia. 

"Members are expressing profound fears about their vulnerability and the scale of the risk level now," said Andrew Linington, with seafarers' union Nautilus International.