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The Pirates' Toll: High Stakes on the High Seas

Stocks in this article: DRYS FREE DSX NMM GNK FRO EXM EGLE

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.

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