Nov 24, 2008

Somali Pirates and Regressions

Shipping companies are having a rough go of it. First it was the crash in the Baltic Dry Index which may have pushed rates below operating costs, let alone debt service payments. If importers can't get letters of credit and trade financing, there's going to be less demand for shipping services. Then there was the increasing risk of highly levered firms being running into technical default due to declining volumes and lower collateral values based on the secondary market for cargo ships. Just when things couldn't get any worse, Somali pirates entered the picture.

Fortunately, we have researchers who studied this issue and summarized their results in a paper: Is Maritime Piracy Random? They cross-referenced a global registry of 350,000 ships against reported acts of piracy from 1996-2005 to develop a regression indicating the likelihood of attack based on flag of registry (country) and ship type. They find that pirates are non-random and tend to prefer Asian ships, especially fully loaded chemical/product tankers because they sit lower in the water, making them easier to board.

I'm not sure this tells us what should be done about pirates, but it does give us some indication of their modus operandi. One rationale cited by a Somali pirate is that illegal overfishing off the coast has destroyed what used to be a viable source of income for many. When you have a boat and you can no longer support yourself with fishing, what else are you going to do with it? Interestingly, the Asian financial crisis of 1997 was cited as a factor behind increased piracy in the region at the time. I guess pirates are the latest countercyclical asset, along with Spam (the meat, not the email) and the 99 Cents Only Stores.

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