Pirates of the Gulf of Aden

The warm waters of the Gulf of Aden became the focus of the world's media after Somali pirates hijacked the Faina, a Ukrainian ship carrying a cargo of 33 T72 Soviet-era tanks as well as other heavy artillery on September 25, triggering fears that the arms could fall into the hands of terrorist sympathizers. With reports of gun battles on board, deaths of both crew members and pirates and a ransom demand of a hefty $20 million, the hijack of the Faina is the highest-profile case of piracy off the Horn of Africa in a year which has seen the area become the world's most dangerous stretch of sea.
The Faina is just the latest in a string of container ships, chemical tankers and private vessels to have fallen into the hands of a cabal of increasingly aggressive pirates. Operating off the coast of Puntland, a semi-autonomous region in the north of the former French territory Somalia, pirates have marauded the waters around the Horn of Africa and the Gulf of Aden since the government of the east African country disintegrated in 1991, but with over 17 boats hijacked in September alone, attacks in the past year have escalated beyond anything previously seen by international maritime watchdogs.
"The levels of piracy we are seeing in the Gulf of Aden at the moment are the highest we have seen since the reporting centre was set up in 1992," said Noel Choong, spokesman at the International Maritime Bureau's piracy reporting arm in Kuala Lumpur. "We have never seen so many ships attacked in such a short period of time and the situation is getting worse. The pirates have also become more sophisticated. While previously pirate gangs would just pick off smaller ships, they are now going for bigger and bigger boats"
The stretch of sea which hugs the coastline of the horn of Africa forms a natural passage up to the Suez Canal, one of the world's busiest shipping routes, through which up to 20,000 ships pass every year. It's the route of choice for anyone wanting to transport goods or commodities from Asia to Europe, and it is used by a large number of metal producers who ship ores and refined metal from mineral-rich Australia.

METAL PRODUCERS STOLID IN FACE OF PIRATE THREAT
The recent upsurge in piracy in the region, which has seen 60 boats attacked since January with 12 boats still being held for ransom, has not yet deterred the world's largest metal producers from shipping through the high risk waters to the Suez Canal. BHP Billiton, Rio Tinto and Xstrata all told Platts that they continue to ship cargoes through the Gulf of Aden, despite the potential cost of ransom and delays to shipments should their cargoes get held up.
A considerable volume of metal gets shipped through the Gulf of Aden and on to the Suez Canal every year. Indonesian tin, nickel-in-matte from parts of Asia and Polynesia, aluminium from the Persian Gulf and some smaller cargoes of Australian iron ore all use this vital trade route to reach consumers, smelters and refineries in Europe.
IMB director, Captain Pottengal Mukendan said that the relative nonchalance displayed by metals producers to the fate of their cargo was unsurprising given that the majority of the risks taken by shipping through stretches of water targeted by pirates are burdened by the ship's owner rather than by commodities producers. "The only effect on the cargo owners is the delay," said Mukendan "There has not been any threat of cargoes being destroyed or ruined as yet, they are just interested in the money."
The flow of money from concerned ship owners into the hands of pirates has grown at a remarkable rate. According to the IMB, previous to the recent upswing in piracy ransoms demanded would rarely top $200,000. The average sum currently demanded by the pirates as ransom is $2 million and with a hefty $20 million asked for the Faina, it looks like a new precedent has been set.

LOSS OF XSTRATA CARGO PASSES PRESSURED MARKET BY
On July 20 a Japanese-registered ship called the Stella Maris was hijacked by pirates near Caluula, carrying a cargo of over 40,000mt of lead ingots and zinc concentrate from Anglo-Swiss mining giant Xstrata's Mount Isa mines near Townsville in Australia, heading for the company's Northfleet refinery near London. Mining giant Xstrata is still locked in negotiations with pirates over the release of the bulk carrier, over two months after the vessel was captured.
"To lose 27,000 mt of lead is pretty drastic and under any other circumstance they would have had to declare force majeure," a UK-based lead trader when asked what impact the loss of the lead would have on the market. "They have been quiet about it and as a result of clever management and belt tightening they have been able to just about squeeze by on what they've got. If they had received the lead then they would have had 27,000 mt more than they could sell. If the metal is delivered in to them before Christmas then they will have a problem. They will have to physically get it through the refinery."
While the metal may not be factored out of the market, it's not clear when, or if it will reach Northfleet. An Xstrata spokeswoman confirmed to Platts that the boat was still being held by pirates in Eyl, but added that the company was pushing for a rapid settlement and that Xstrata was confident that the material would soon be back into the market.
While the ship and its crew languish in captivity off the Puntland coast, the value of the cargo of the Stella Maris remains subject to ever more volatile market conditions. Three-months lead and zinc on the London Metal Exchange have seen prices slump throughout the third quarter of 2008, with zinc seeing over 25% of its value disappear since May and lead dive down by around 35% in the same period.
"The market would be better off if that lead and zinc just sank," one European trader told Platts. "At least that way it might do something to shore up prices." Other traders argued that it was difficult to gauge the true effect of the absence of the hijacked metal on the market given the current financial maelstrom, which has made it increasingly difficult for market players to accurately judge demand strength.
Paul White, head of forecasting and statistics at the International Lead and Zinc Study Group told Platts that, "the metal will still be on the market no matter where it is, if in a boat off the coast of Somalia or in the UK. In terms of lead concentrates there is a fair amount coming into Europe at the moment. If the market is weak, a trader may not be able to pass on costs to a buyer. This is the situation we see with lead and zinc at the moment."

SHIP OWNERS TO BEAR HEFTY INCREASE IN INSURANCE PREMIUMS
As the bulk of Western economies slip into a high inflationary climate and projected industrial demand for metal slips, the impetus for companies like Xstrata to put pressure on ship owners to rescue hijacked ships and return their cargo to the market could lessen. The European physical market for both zinc and lead has changed considerably since the hijacking of the Stella Maris, with premiums for both metals on an in-warehouse Rotterdam basis hovering nervously in range but looking likely to fall in the face of a distinct pullback in demand.
The IMB's London spokesman Cyrus Mody said that the situation is now out of hand: "The pirates know which boats are worth hijacking now. They are not being picky but they are becoming increasingly audacious and Somalia does not have a government which can control the situation. If ships are going to head around the Cape of Good Hope rather than through the Suez canal then that's going to add another 10 to 15 days to their voyage. Industry has to take a calculated risk in these circumstances."
Until recently, high freight rates gave ship owners the luxury of choosing not to accept a fixture which involved such high levels of risk, or else charging vast premiums to accept it. However, freight rates have taken a hit from the waves of global economic turmoil which show no sign of abating any time soon,
A spokesman for specialist insurers Hincox in London told Platts that premiums for insurance against piracy had risen considerably recently, increasing tenfold from around $900 a year ago to almost $10,000.
The UK Protection and Indemnity club, a mutual insurer owned and governed by ship owners, said that it was becoming increasingly difficult to distinguish what, in insurance terms, amounts to piracy.
"Some so-called acts of piracy may be more akin to acts of terrorism and therefore be excluded from P&I cover and fall within the scope of war risks cover," said the P&I club. "To be safe therefore ship operators should liaise with their brokers to confirm that they have in place comprehensive war risks cover to ensure that both their own property and their potential liabilities are appropriately covered in the case of attack."
Mark Jenkins, a London-based analyst at international shipbrokers ICAP said that despite the risks and costs involved to both ship owners and crew, brokers at ICAP were not aware of any direct impact on normal tanker flow through the Suez Canal, despite the rising incidence of piracy.
--Michelle Madsen, michelle_madsen@platts.com