Africa, Commodities trading and Piracy
The combination of the three words ‘Africa’, ‘commodities trading’ and ‘piracy’ would have had four years ago everybody talking about piracy off the coast of Somalia. However, four years on and this is fortunately, no longer the case.
According to the International Chamber of Commerce (ICC) International Maritime Bureau’s (IMB) annual report on piracy, the total level of piracy and armed robbery incidents in 2015 was only 1 more than in 2014 and no Somali based attacks were reported in 2015. Whilst good news the problem of piracy has not gone away. Piracy and armed robbery are still flourishing in certain regions and one of those regions is the Gulf of Guinea.
The nature of piracy and armed robbery has changed and is now more cargo conscious and sophisticated. The pirates target cargo where there is a thriving local black market or a pre-arranged buyer for that cargo. The main cargo being targeted is refined oil and gas where pirates (known as “Petro Pirates”) board the vessel and siphon off these products for resale. For example, Nigeria is an oil rich country but it has limited refining capacity so there is a ready market for the refined product. Another difference is that the incidents of armed robbery and piracy occur at the ports or in the territorial waters of the countries rather than in international waters meaning that there is little possibility for the international community to organise multinational taskforces to address the issue as it did in the Horn of Africa.
Consequently, the risk of piracy and armed robbery continues to be a cost of doing business that commodity traders and banks financing commodities need to address. This risk is addressed in a large part through insurance. When banks are entering into sale and purchase agreements they will normally require the trader to have insurance over the cargo as well as an all risks (including piracy) insurance policy and banks will also quite often have their own contingent insurance policy in place.
However, merely having insurance is not sufficient to give peace of mind as the consequences of piracy are often not just financial. There is obviously the risk of loss of life or injury but there are also reputational and political repercussions. Therefore, traders and banks also attempt to tackle the risk of piracy by putting in place operational and contractual systems to attempt to ensure that piracy does not happen in the first place. Practically, this can be achieved by vessel owners or charterers hiring security forces or simply avoiding certain shipping routes if this is possible. However, given that the Gulf of Guinea is a major source of oil, cocoa and metals for world markets this is not always possible and inevitably leads to higher financing costs when exporting commodities from this region.
Certain banks financing the commodities, especially if financing is achieved through a sale and purchase arrangement where for a certain period of time the bank owns the commodities, may require in their agreements undertakings that the commodities do not enter the territorial waters of countries deemed to be high risk. Other banks go one step further especially when the product being financed is oil, gas or metals and require the ability to approve the proposed shipping route before the bank agrees to purchase the commodity. Any deviation from the approved shipping route will result in a breach of the agreements and all the monetary consequences that flow from such breach.
Unfortunately, for the time being, this is a risk that is not going away and piracy in the Gulf of Guinea alone is estimated to cost the world economy over US$2 billion annually.