This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Pirates' Toll: High Stakes on the High Seas

Stocks in this article: DRYSFREEDSXNMMGNKFROEXMEGLE

The whole connected waterway -- GOA, Red Sea, Suez, Med -- is one of the busiest shipping lanes on earth. The goods of the East en route to the merchants of Europe (and vice versa) -- it isn't so much the descendent of the Silk Road as the current iteration of it. A guesstimated 20,000 to 25,000 merchant ships move through the waterway each year (no one knows for sure how many, not even the Suez Canal), including as much as 20% of the world's ocean-going oil. For the pirates of Somalia, this presents a rather target-rich environment.

Christodoulou and ISEC therefore faced a choice: either send the Biscaglia through the Suez, risking an attack or worse, or take the long route around Africa, around the Cape of Good Hope, up the west coast of the continent and on to Spain. It would add something like 8,000 miles and three weeks to the trip -- at the time, about $350,000 more in fuel costs than the Suez route. Of course, bypassing the canal would save ISEC about $250,000 -- the amount in fees the Suez charges for a ship of the Biscaglia's size.

It's well understood among shipping people that if the industry were to collude, and everyone agreed to bypass the Suez, freight rates would rocket; the longer voyages would pull ships off the market, squeezing supply. "Piracy could be considered a good thing," says a shipping-stock analyst, "if you look at the supply-demand balance."

But the longer journey would take money out of ISEC's pocket in other ways. Because the company hired out its ships on the spot market as opposed to fixing them into long-term charters, the longer the delay on one trip, the more it would reduce the available days for the Biscaglia to earn money on future voyages: the cost of the lost opportunity. ISEC figured that number at about $400,000, according to the going spot rate for a Biscaglia-size product tanker, which was then a little north of $20,000 a day.

Further, ISEC wasn't exactly in a position of cash strength. Things were tight. It owed a bank. The bank wanted a debt payment by the end of the year. ISEC needed the voyage's $600,000 in revenue to make the payment. If the ship had to circumnavigate a continent, it likely wouldn't discharge its palm oil -- and receive its $600,000 -- until January. Going around Africa, then, could possibly mean delinquency.

Piracy vs. delinquency, the odds of a hijacking against the probability of missing a debt payment, "which would send up red flags at the bank at a time when we didn't want to send up red flags": this was the calculus of the moment. And the calculus said: via Suez.

Back then, in the fall of 2008, piracy in the GOA had only just begun to make headlines in the U.S. By far the most famous pirate incident to date, the bloody attempted hijacking of the Maersk Alabama, when Navy SEAL sharpshooters killed three pirates holding the ship's captain hostage in a lifeboat after a botched raid, wouldn't occur for another five months. The aftermath of the rescue is pictured above; the orange craft is the Alabama's lifeboat.

8 of 21

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,718.27 +256.95 1.56%
S&P 500 1,954.48 +27.37 1.42%
NASDAQ 4,456.2470 +73.40 1.67%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs