Global supply chains affected by piracy

Piracy costs the world economy US$12 billion a year which will affect the entire supply chain and push up all prices of all transported goods, according to recent research.

Research conducted by the Ocean Beyond Piracy project, part of One Earth Future, has attempted to measure the full economic cost of piracy.

The international community's military and legal approach is only palliative in nature. The problem stems from the power vacuum in Somalia. Until this issue is addressed, key global logistics channels will continue to be at risk.

For the pirates at sea, it's a question of supply and demand. As the prices of ransoms inflate, more pirates are attracted to the "market". The payment of these costs is rarely revealed, with transporters and shippers preferring to quickly pay the extortion fee without attracting negative publicity. However, the rising costs will filter through the supply chain and will be reflected in the final cost of transport.

Buyers may feel overawed by the international nature of this problem. But procurement departments need to factor this risk into the pricing of goods through piracy hot-spots - this includes the Gulf of Guinea and the Malacca Straits, as well as the Horn of Africa. Unfortunately, global companies will continue to pay higher prices until there is a global solution to this problem.

A total of US$238 million was paid in ransoms during 2010, with the cost of ransoms increasing from an average payment of US$150,000 in 2005 to US$5.4 million in 2010.

A South Korean oil tanker was ransomed for US$9.5 million in November 2010. By the end of the year, 500 seafarers from 18 countries were being held hostage.

There are other, indirect costs to this problem. The project estimates excess costs of insurance due to Somali piracy at between US$460 million and US$3.2 billion. Given that the risks off the East African coast have caused many shippers to redirect their routes around the Cape of Good Hope, these re-routing costs are thought to have added between US$2.4 and US$3 billion on yearly shipping costs.

The sum total of these, plus costs of prosecuting piracy, maintaining anti-piracy organisations and additional security equipment costs, equates to a figure between US$7 to US$12 billion per year.

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