Shipping News – Pirate Update

The Somalian pirates seized another big ship the other day. This time it was a large oil tanker. I spoke with a friend who owns ships and lives in Athens about the latest attack. He provided some interesting information. My notes from the conversation:

The seized tanker is owned by a large and successful family owned Greek shipping company. Pirates have hit Greek ships before, but this is the largest ship to be captured. There is $200mm worth of crude on board. The vessel is worth $100mm – 200mm. There was a crew of 25 of which eight were Greeks, most of whom were officers.

The Greek shipping world is PISSED at this one. The combination of the money and the fact that Greek crew members are involved makes this a very big deal.

I got a status on the bigger picture in pirate land:

There are currently 20 ships of all sizes and uses currently be held by Somali pirates. There are approximately 700 prisoners being held. It generally takes two to three months to negotiate and pay a ransom. My guy estimated that in the past year nearly $300mm in ransom has been paid to pirates.

There have been attempts to thwart the pirates but they are (obviously) not working. NATO has warships in the region as does the United States. The problem appears to be the “rules of engagement”. The Western powers have the ability to stop and search suspected pirate ships. But when the pirates see them coming they dump their arms overboard. Therefore they are released as only armed ships and crews can be seized and taken out of commission. The pirates are well aware of these rules.

This part I found very interesting:

The Chinese Navy has a large presence in the region. Rather than just sail around looking for pirates the Chinese are creating large convoys of ships headed for China. The Chinese Navy is escorting these ships through troubled waters. Very few ships destined for China have been attacked as a result. Of interest is that the Chinese are now offering to escort non-Chinese vessels to safe waters (for a large fee).

The problem with the convoy approach is that it is very expensive. Ships have to wait to embark until a large enough convoy has been formed. Time is money in shipping. In addition, there is the very large expense of the Chinese navy ships and their crews. Apparently China Inc. is willing to foot the bill as they don’t want to be in the difficult position of losing a ship and then have to send military forces (or big money) to retrieve it. Korean special Ops did retrieve a seized ship last year, but in the process several crew members were killed and the ship in question suffered significant damage.

Once the pirates seize a ship at sea they have won. The ships/cargos/crew are far too valuable to risk with military operations. It is much “cheaper” to pay a $30mm ransom than to risk a $300mm loss. The owners/lenders/insurers all understand these facts. So do the pirates.

Therefore the only “solution” to the pirate problem is to send in troops. Get boots on the ground, find the pirates and wipe them out. But the question is, “whose boots”? There are only two possibilities.

The US has 60,000 Special Forces that are technically available for combat operations. These troops are battled tested and are a formidable force. They would be more than up to the task of taking on the pirates. But our Special Forces are already overextended after so many years in Iraq and Afghanistan. The ‘excess force’ doctrine requires that if the US commits troops it’s done so in overwhelming numbers. We do not have those “overwhelming” numbers at the moment.

The other alternative is NATO. The Brits, Germans, French all have highly trained forces that would be up to the job. NATO has the large amphibious capability that is required. But the thinking is that NATO does not have as much at stake given the sea routes. And therefore they are unlikely to commit troops either.

It would appear as if the status quo has to continue based on this. But my friend thinks that something must come relatively soon whether the US or NATO likes it or not. His reasoning:

What are the pirates doing with $300mm a year of cash income? Buying better, faster attack boats. They are buying more and more sophisticated military equipment including advanced weapons systems and communications equipment. They are hiring more pirates. With each ship they seize they get stronger. This simply can’t be allowed to happen for much longer is the thinking.

There are two very big wild cards in this story. Either of them could tip the balance and force either NATO the US or combined forces to act in the near future:

The route to Europe for shipping is the Suez Canal. Should things develop in Egypt such that the canal is either closed or perceived to be unsafe then thousands of additional ships will be forced to sail in Somali waters to get to Europe. The pirates would love that. More ships, more opportunity.

The final consideration is what is happening within Somalia. There is a group called al Shaabab. They are Muslim extremists. They too are highly armed. They have been fighting with the Somali pirates. Al- Shaabab wants to take over the job the pirates are doing. They want the money and the power that comes from pirating ships.

The concern is that al Shaabab will succeed. If they do they will be in even more powerful menace than the current pirates. Even worse, they are Muslim. The US and NATO simply cannot put forces against Muslims at this time. That would be very bad global politics.

So there are two time fuses that could force military action. If the Suez is closed or if al Shaabab gets aggressive then force will be required. The thinking from Athens is that either or both of the conditions will be met in the not too distant future. Military action is not far off.

About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

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