New piracy levy to push up the cost of imported goods

Shipping lines have introduced a new insurance premium for goods destined for Mombasa port, piling pressure on the cost of imported products in the region.

The new premium, known as the general cartage insurance, stems from a recent resurgence of piracy in the Gulf of Aden where more than 45 ships and 800 sailors have been hijacked in the past 14 months.

Strong demand for South African coal in the fast-growing Asian economies is also taking up large fractions of the available shipping capacity and exposing more ships to pirate attacks adding pressure to the cost of sea transport.

Shippers began levying the new premium on March 1 and importers have promised to pass on the additional cost to consumers, heralding a surge in the cost of imported goods in the coming weeks.

Somali pirates have in the recent past hijacked oil tankers, passenger ships and yachts but have since turned their guns on the slow-moving bulk coal carriers.

Gilbert Langat, the chief executive officer of Kenya Shippers Council (KSC), whose membership is composed of both importers and exporters, said the new insurance premiums could push the cost of imported goods by a margin of up to 10 per cent.

The levying of cartage insurance, which shippers say raises the cost of underwriting goods in transit by eight per cent, is expected to fuel use of fake insurance stickers by transporters to reduce their costs, exposing cargo owners to high risk of total loss in case of an accident or criminal attack.

Exclusive application of the new insurance premium to local transporters is causing fear of potential loss of business to competitors in the region, whose charges are expected to remain the same.

“The increase will affect local transporters disproportionately as it does not apply to competition from the other players in the region. This poses the risk of loss of business to other players in the region whose costs will be lower than ours,” said Ms Eunice Mwanyalo, the chief executive officer of the Kenya Transporters Association (KTA).

Last year, Lloyd’s of London found that insurance premiums on vessels passing through the pirate-infested Gulf of Aden have risen by between 0.05 per cent and 0.175 per cent of the value of cargo, compared to between 0 per cent and 0.05 per cent in May 2008.

“The high cost of keeping global trade routes open could result in a growing ‘piracy tax’ that will be felt by a wider range of businesses and consumers, already battered by the effects of recession,” Lloyd’s said.

The number of piracy attacks surpassed the 400 mark last year, the highest since 2003 with attacks off the Somalia coastline accounting for more than half the total, according to the International Maritime Bureau (IMB).

The total number of incidents attributed to Somali pirates in the 12 months to January 2010 stood at 217.

The attacks resulted in hijacking of than 47 vessels and the holding of 867 crew members hostage.

“Piracy is becoming a real headache and is going to get much worse as more coal leaves South Africa for India, China and elsewhere in Asia,” one South African shipping source told Reuters in January “It is definitely costing people more money in insurance, in fuel, in security.”

India and China, could take up to 75 per cent of South Africa’s 65 million tonnes of thermal coal exports in 2010 as demand shifts from Europe to Asia, putting many more ships in the gun sights of Somali pirates, analysts said.

“Shipping lines have introduced a piracy surcharge to cover the risk of attacks in addition to other charges such as war risk surcharge, voyage time surcharge to compensate for the longer route being taken to evade pirates,” said Mr. Langat.

To reduce attack exposure, ships have raised bunker heights to make it difficult for pirates to get on board, travel in convoys or even use armed escort that only increases operation costs.

A number of shipping companies involved in the coal freight business have admitted facing high insurance costs or taking longer routes that also came at a higher cost.

Piracy risk cover on a voyage from South Africa to India adds $30,000 to the basic insurance cost, according to some estimates.

Navigation through longer routes adds between $40,000 and $50,000 to ordinary shipping costs.

Mr J. Peter Pham, an African security adviser to US and European governments and private companies, says that dry bulk ships that carry commodities such as coal, iron ore and grains, are more vulnerable to pirate attacks partly due to their slow speed and older age.

“When they are fully loaded with their cargo they tend to have a low freeboard (the distance between a ship’s railings and the water) and are easier to attack even in motion,” he told Reuters in a recent interview. “If you are moving more coal in these types of carriers, it is fairly reasonable to say you are probably going to get more attacks on them.”

In terms of voyage time ship vessels are opting for the longer route through West Africa and the port of Good Hope in South Africa that lengthens the shipping time by up to a month.

For instance the Fresh Produce Exporters Association of Kenya (FPEAK) has lamented at the increased length and cost of delivering fresh produce to key markets in Europe.

“The cost of transporting avocado, mangoes, pineapples or vegetables to Europe has risen by at least $2500 (Sh187,500) per container mainly driven by increased shipping and insurance due to rampant piracy,” said Stephen Mbithi, the FPEAK chief executive.

Longer shipping time is forcing exporters to use more advanced vessels with controlled environment containers to ship their produce instead of traditional refrigerated containers.

Shippers say that the controlled environment containers which prolong the shelf life of the fresh produce cost $4,800 compared to $1,200 for the normal refrigerated containers.

This has affected fresh produce such as avocadoes and tea which are largely shipped by sea due to their bulky nature and in the process leading to loss of income by small scale farmers who are the main producers of these produce.

For tea traders, irregular shipping schedules to the main Pakistan market because of the piracy has hurt their business in that at the peak of the global financial downturn, most shipping lines lowered the frequency of voyages along the route to cut down on loses.

Many ship owners only took orders once sufficient volumes had been amassed to maximise on economies of scale.