US President Obama has issued an Executive Order with the heading “Blocking Property of Certain Persons Contributing to the Conflict in Somalia”, which could have an impact on the possibility for paying ransom under some circumstances. The situation is not clear and perhaps some ship owners will consider how to address this situation before transiting the Gulf of Aden and the Somali Basin. On that background, we hereby include an updated version of our calculations regarding the cost part of the decision to go round the Cape of the Good Hope.
If you effectively want to reduce the risk of getting your vessel captured by pirates, please see related links below for more information on the Executive Order and “Best management practices to deter piracy in the Gulf of Aden and off the coast of Somalia”.
This updated cost-side analysis from BIMCO estimates the costs under the current market conditions that give 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 4.0 million while an owner of a Very Large Crude Carrier (VLCC) will loose as much as USD 8.8 million per annum in order to avoid the pirates off the coast of Somalia by sailing round the Cape instead.
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.
What has changed since the last update in November?
One important issue that has changed the picture dramatically is the potential repercussions for ship owners of the executive order issued by US President Obama. Furthermore, the bunker prices have gone up by 4%, time charter rates and ship values have increased for container vessels while Suez Canal tolls have declined by 5%.
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 30% or more 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 (Rotterdam) adds 42% extra nautical miles to the voyage.
Source: AXSMarine Distance Table
The costs incurred from going round the Cape is 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 consist of canal tolls, extra insurance risk premium and the use of services such as tugs, pilotage and mooring. Canal costs have decreased by 5% over the last five months.
Higher bunker prices hits liner owners the most
The toxic combination of low freight markets and high bunker prices provides a strong incentive for container owners to proceed with business as usual and direct their vessels via the Suez Canal when compared to the safer, but more expensive option of going round the Cape. For economic reasons the choice should be the least costly option of the two, which is going via the Suez Canal, but that choice increases the risk of getting your vessel attacked and potentially captured by pirates.
Stringent economic thinking in the liner business
The relatively high bunker prices heavily affected the calculus for a 10,000 TEU PPMX container vessel; from favoring the route round the Cape when bunker prices are low, container owners have 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 370/tonnes which are 23% below today’s market prices. If bunker prices were to stay below USD 370/tones it would make economic sense to redirect your container vessels to go round the Cape. Five months ago the break even bunker price stood at USD 390/tonnes, but surge in time charter rates and ship values have pushed this figure downwards.
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 at USD 482/tonnes, a container vessel owner would loose USD 4.0 million 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 there is a relatively small risk when sailing at a service speed of 25 knots with a high freeboard.
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. 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.
Significant cost issue due to needed extra capacity
One-year time charter rates for a VLCC are currently at around USD 36,000 per day. Although in absolute terms the crude tanker market is not hit as hard as the container market, this does mean that the opportunity costs for the extra capacity needed to use the trading route around the Cape is of far more significant to the VLCC owner than for the container ship owner where time charter rates are around 13,000 per day. 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
In today’s markets and given the model assumptions, the analysis for a 318,000 dwt VLCC reveals that if freight markets were to tumble dramatically to USD 13,000 a day, the insurance risk premium per transit via the Suez Canal through the Gulf of Aden should quadruple 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 straightforward, 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 are 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 accepts 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 4.0 million while an owner of a Very Large Crude Carrier (VLCC) will lose as much as USD 8.8 million per annum in order to avoid the pirate-infested waters around the Horn of Africa by sailing round the Cape instead.
BIMCO has an Excel-based cost calculator to be used as information tool only (See related link below). 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 easily 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. All the details and assumptions are readily available in the Excel-based cost calculator.
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 in November 2009. 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.
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