SECURITYSECURITYEconomic Consequences of Piracy on shipping and its Impacts on Global

Supply Chains

The Cost Factor

Economic Consequences of Piracy on shipping and its Impacts on Global Supply Chains

The Cost Factor

Kewo, William James

OutlineOutline

• Introduction • Definition• The high costs of maritime piracy to the shipping

industry• Impacts of piracy on the maritime supply chains• Alternative risk management solutions• Summary• Recap and questions

IntroductionIntroduction

Costs – shipping industryImpacts – maritime supply chainsAlternatives – risk management solutions

•Global maritime supply chains are exposed to risks that have significant impact upon production lines, causing shortfalls in inventory levels or even shutting down production flows

•Shipping is the heart of global trade

•About 90% of total volume is carried by sea•About half the world’s trade by value and 90% of general cargo is transported in containers

•Disruptions to supply chains due to piracy is catastrophic

DefinitionDefinition

The following definition of piracy is contained in article 101 of the 1982 United Nations Convention on the Law of the Sea (UNCLOS):

“Piracy consists of any of the following acts:

(a)any illegal acts of violence or detention, or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft or against persons or property onboard such ships or aircraft, and directed;

i. on the high seas, against another ship or aircraft, or against persons or property onboard such ship or aircraft;

ii. against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;

(a)any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft;

(a)any act inciting or intentionally facilitating an act described in sub-paragraph (a) or (b).”

The high costs of maritime piracy to the shipping industryThe high costs of maritime piracy to the shipping industry•Asia-Pacific Region – annual losses totalled up to US$15 billion•Both human and economic costs are imposed upon shippers, deterring legitimate marine commerce upon which our economies so deeply depend•No clear marine policies relating to

•Officers being captured onboard•Crews being captured onboard

•Demand for ransom•US$100,000-US$200,000 (est. US$1 million annually)

•Premiums•US$500 to US$20,000 for single transit (Gulf of Aden)•E.g. US$30,000 for US$3 million kidnap ransom

•Huge amounts of money encouraging piracy actions•High powered boats•Improved navigation and tracking devices•Very powerful armaments

Impacts of piracy on the maritime supply chainsImpacts of piracy on the maritime supply chains

•Re-route issues•Continue transit

•Faced increased risks and higher costs•Re-route – face increased costs for both ship and cargo

•Re-route – effect on regional economies•Suffer significant loss of foreign currency•Negative impact on GDP•Lose operating earnings, including unemployment•Decline in ship calls plus size•Decline in transhipment/transit cargoes – strong decline in revenues•Increased total operating expenditures•Decreased carrying capacity•Impact of costs would possibly be passed on to cargo owners•Price increases and longer transit and delivery times•Additional voyage costs•Higher bunker costs•Additional cargo inventory plus additional equipment costs

Alternative risk management solutionsAlternative risk management solutions

•Managing unknown risks

•Invest in redundancy•Sensing and responding•Create adaptive supply chain

•Managing global risks

•Speculative strategy•Hedge strategy•Flexible strategy

LimburgLimburg

• Significant impact upon the Yemeni maritime industry• Plummeting throughput within terminals• Putting off more than 3,000 jobs• Government-estimated loss of US$15 billion per

month• Ships re-routing

• For fear of further attack• Exorbitant insurance costs

ConclusionConclusion

•Global maritime supply chains are exposed to risks such as piracy•Huge costs to shipping companies

•Significant increase in insurance rates•Dilemma in maritime policies

•Significant impact on supply chains

•High inventories •Closure of ports•Loss of employment•Loss of revenue

•Weakens global economy•Risks management strategies

Questions?Questions?