Somali piracy costs Suez Canal business

With more ships opting to go around the Cape of Good Hope to avoid Somali pirates rather than pass through the Suez Canal and enter the world's most dangerous waterway, Egyptian officials are concerned about a steep drop in revenue and its effect on the nation's economy.

The Suez Canal has long served as a reliable source of foreign currency, and falling revenue will affect not only Egypt's balance of payments but also a rising budget deficit. After tourism and remittances from Egyptians living abroad, the canal is Egypt's main source of foreign currency. In the last fiscal year, the canal earned more than $5.1 billion. But revenue is expected to decline to $4.5 billion in the current fiscal year and $3.6 billion in the next, according to EFG-Hermes, a Cairo regional investment bank.

Taking the long way

The threat of Somali pirates has prompted some of the approximately 20,000 vessels that use the Suez Canal annually to go around the Cape of Good Hope rather than enter the Gulf of Aden, says Neil Davidson, director of ports at London-based Drewry Shipping Consultants.

Denmark's Maersk Line, one of the world's largest shipping lines, is rerouting some of its ships for security concerns, says Finn Brodersen, the company's senior director of technical organization.

"If they cannot be protected by military resources in the area, then these vessels have to go south of Africa," Brodersen said.

Somali pirate attacks increased tenfold in the first three months of 2009 in contrast to the same period in 2008, according to the Malaysia-based International Maritime Bureau, a piracy watchdog group. Pirates typically attack unarmed vessels in small skiffs with automatic weapons and rocket-propelled grenades. If unable to escape, the ship is taken over by the pirates, sailed to the Somali coast and held for ransom. Last year, pirates received some $80 million for the release of ships, according to several press reports.

As of April 20, Somali pirates were holding 15 ships with some 250 crew members, according to the bureau. The bureau says pirates have already seized 23 ships in 91 attacks - 59 in the Gulf of Aden and 32 off the east coast of Africa in 2009.

Somali piracy is hardly a new phenomenon. After the collapse of the nation's central government in 1991, foreign ships arrived in Somali waters, illegally dumping hazardous materials and fishing for tuna, shrimp and lobster. This spurred some destitute Somali fishermen to form the Volunteer Coast Guard of Somalia to dissuade dumpers and fishermen and sometimes elicit taxes from both. By the beginning of the decade, many fishermen had turned to the more lucrative business of piracy.

The danger to merchant ships has led the United States, China and Japan, among other countries, to send naval vessels to help protect ships against piracy. NATO established the Combined Task Force 151, while the European Union created a naval mission to protect World Food Program shipments to Somalia, safeguard vulnerable ships, and disrupt and deter piracy.

"The EU's main effort is in the Gulf of Aden through which about 20 percent of all global sea traffic travels and where ships are at their most vulnerable," said British Royal Naval Reserve Cmdr. Alistair Worsley, an EU spokesman.

Just last week, Gen. David Petraeus, the top U.S. military officer in charge of the African coastline, told Congress that shipping companies should stop regarding piracy as just a business problem and consider hiring armed guards to protect their ships.

To be sure, piracy is just one factor affecting Suez Canal revenue.

Trade falling

Falling global trade is a major influence. And high transit tolls are "one of the serious costs of doing the passage, whichever way you go," said Peter Hinchliffe, marine director of the International Chamber of Shipping. The average toll to cross the canal is about $250,000 per ship.

In a recent news release, the Grand Alliance, a container consortium of four large shipping lines, announced in February that it is rerouting some of its vessels sailing east between Europe and Asia around the Cape of Good Hope, citing "high Suez Canal toll fees, which are difficult for carriers to afford in the current economic environment."

And falling fuel prices have increased the allure of sailing around the Cape. "If fuel costs jump up again, then clearly Suez becomes more competitive once again," Davidson predicted.

But shipping companies also face hefty piracy insurance fees for sailing through the Gulf of Aden - an average $20,000 per ship, according to Robert Davies, kidnap and ransom underwriter at Hiscox, a Bermuda company specializing in risk insurance.

Perhaps with these factors in mind, Suez Canal Authority Chairman Ahmed Ali Fadel has said Egypt will not increase canal tolls in 2009. Instead, the authority will continue to offer rebates to ships on long hauls on a case-by-case basis. Canal officials declined to be interviewed for this article.

Meanwhile, an official of the Asian Shipowners Forum, whose members make up about half of the world's merchant fleet, recently said that Somali pirates will launch more sophisticated and better-armed attacks this year on vessels in the Gulf of Aden. Such predictions have Egyptian officials nervous that canal revenue could fall even further. "It's something they are concerned about," said Simon Kitchen, an economist at EFG-Hermes.