AFRICA: Kenyans will not benefit from cut in ocean freight cost

Kenyan consumers and exporters might not benefit from an expected slump in the cost of global ocean freight, a new report by a UN agency shows, citing effects of piracy off the coast of Somalia.

Kenyan imports currently attract an extra monthly cost of Sh2.15 billion ($23.9 million) that is passed down the supply chain owing to high risk posed by piracy around the Gulf of Aden, the UN Conference on Trade and Development (Unctad) said.

Exports from Kenya also face an additional monthly cost of Sh8.82 billion ($9.8 million) as shipping lines adjust their freight rates to cover the risk premiums slapped on them by insurance firms while navigating the dangerous route off the shoreline of Somalia.

“The scale of the attacks and the size of the vessels targeted are raising further concerns in the international community,” the UN agency said.

“This threatens to undermine one of the world’s busiest shipping routes (Asia–Europe) and chokepoint (the Suez Canal).”

In 2010 Kenya lost Sh37.26 billion ($414 million) in macroeconomic costs owing to the piracy menace, Unctad said, making the country only second to Egypt that lost $624 million.

Other countries that suffered major losses due to piracy were Yemen ($150 million), Nigeria ($42 million), and the Seychelles ($6 million).

Sea trade remains critical for Kenya which relies on it for movement of key products such as clinker, tea, iron and steel, petroleum, grain, fertiliser, sugar, ceramics as well as motor vehicles.

The global cost of freight is expected to fall sharply following a record number of new larger vessels that have entered the market, promising to lower the consumer price of import and export goods.

Data released by Unctad shows that there was a record delivery of new ship capacity in 2010, a massive 28 per cent higher than the previous year, resulting in an 8.6 per cent growth in the world fleet.

“The surge in vessel supply is the result of orders placed before the economic crisis.

“This, combined with lower than expected demand, has led to a situation where there is an excess supply of shipping capacity,” Unctad said.

The sharp increase in vessel supply has been registered in the category of ships that handle dry bulk cargo and containers that are popular with Kenyan traders. “In both sectors, recent and upcoming record-sized new buildings pose a further challenge to owners, who will need to find cargo to fill their ships,” Unctad said.

The extra capacity is expected to slash freight costs on account of lower demand for vessels even though regions such as eastern Africa that are prone to piracy may not enjoy such benefits.

“We don’t expect any major variations in the cost of shipping services until the piracy problem is sorted out,” Abdallah Juma, a Mombasa based cargo dealer said by phone.

Lack of a substantive government since 1990 has seen criminal gangs in Somalia venture out into the Gulf of Aden hijacking vessels for ransom.

This has triggered major increases in shipping charges as the cost of insurance premium for vessels plying the key rout was adjusted upwards.

Freight costs have also shot up following a decision by shipping lines to take longer alternative routes round the Cape of Good Hope.

Analysts with Unctad said the pressure on freight costs around eastern Africa is likely to persist because most vessels have opted to stay on the route around the Gulf of Aden.

Root out piracy

“Insurance risk premiums and the Suez Canal transit fees offset to a great extent the additional fuel and opportunity costs of going through the Cape of Good Hope,” Unctad said.

Several international navies including the US, France, Russia, and Britain are currently active on the waters around the Gulf of Aden to try and root out piracy.

Recent statistics show that the number of ships hijacked off the coast of Somalia continued to fall sharply this year due to patrols and intervention by international naval forces, raising hope for gradual reduction in the cost of freight services along the key sea route.

Somali pirates have only managed to hijack 24 vessels in the nine months to September compared to 35 in a similar period of 2010, a 31 per cent drop.

Hijackings were successful in just 12 per cent of all 199 attempts this year, down from 28 per cent in a similar period of 2010 when 126 were taken over, a watchdog, the International Maritime Bureau, said.