Figure 1: Maritime Risk Map, 2013 (Source: Control Risks)

Would-be charterers of vessels calling on India often find ship owners are reluctant to call on West Indian ports, or at least an unwillingness to do so without receiving a freight premium. Shipbrokers may not say why, leaving charterers to believe it has something to do with monsoon season or some other intangible reason. While weather certainly affects shipping route choices, it is more likely in this case that piracy plays a dominant role in the decision. As Figure 1 shows, the so-called “East Africa Hotspot” covers a vast area of the Indian Ocean, including all of western India and a huge area of East Africa. The biggest piracy “hotspot” in Southeast Asia is the Malacca Strait, but our focus for now is on West India.

U.S. coal producers need new coal markets now, but as is often the case, “if it seems too good to be true, it frequently is.” East Coast and Gulf Coast exporters seem to have little choice but to ship via the Suez Canal, unless they wish to pay a premium for shipping another 2,590 nautical miles around the Cape of Good Hope in South Africa. While the primary destination for met coal would be the east coast of India, the only way to get there at minimum piracy risk would be to ship around the Cape of Good Hope. There is, of course, the choice preferred by many shippers: let the buyer charter the ship and take all the shipping risks. However, in case the coal buyer wants to bring up the extra cost of shipping the safer route, the coal seller should be prepared. The extra nine days of travel time would cost about $90,000-$100,000 at today’s daily rates for Panamax or Capesize vessels, but this would partially be offset by Suez tolls and higher insurance premiums.

Some of the lower-quality iron ores mined in India have a higher than normal alumina content, which leads to higher slagging (residue from smelting of ore) in the blast furnace. As a result, when using increased amounts of the lower-grade iron ore, blast furnaces require higher levels of heat.

Domestic steel companies have traditionally preferred high-grade ores as every percentage point increase in iron content improves productivity by 2% and reduces coking coal consumption by 1%. High-grade ore contains more than 64% iron.

Mining bans in key producing states have forced Indian steel companies to adopt methods to be able to use even low-quality ores, containing as low as 48% iron accumulated over the years. Many of the so-called beneficiation plants, which extract waste material from ore and increase iron concentration, are struggling with high percentages of waste materials. Low-grade ores contain very high alumina and silica, which cannot be taken out during the beneficiation process. This results in higher fuel consumption.

Coking coal consumption could rise about 15 % this fiscal year mainly due to the use of low-grade iron ores. JSW Steel imports all of its coal needs (about 14 million mt last fiscal year) due to a shortage at home. Kalyani Steels’ imports of coke, derived by heating coking coal, would rise 50% to 150,000 mt this fiscal year as it uses low-grade iron ore.

In the current fiscal year, Paradip Port Trust (PPT) projects exports of 5.5 million mt of iron ore, including about 1.5 million mt of iron ore pellets. This is 300% more than the 1.8 million mt iron ore exports recorded by the port last year. The higher target is based on improved global demand for this steel making raw material. For 2013-2014, PPT has set a target of 4 million mt of iron ore exports along with 1.5 million mt in iron ore pellets. Pellet exports are just emerging and will continue to grow.

In 2012-2013, poor Chinese demand coupled with problems in availability of iron ore within the state due to restrictions imposed by the government, had pegged back the exports to a historical low of just 1.83 million mt, against 12 million-3 million mt reported annually in 2008-2009 and 2009-2010.

The unavailability of iron ore was so acute last year that local steelmakers, such as Bhushan Steel and Power Ltd., had to import iron pellets from Brazil to run its mill in Sambalpur district. Though Odisha produced 62 million mt of iron ore in the last fiscal year, it was not easily available to steel mills, as the state government had imposed restrictions on road transportation of minerals. However, major miners attributed the lull in exports in 2012-2013 to higher pricing and stiff export duty slapped by the Union government. In February 2013, the rates rose to $158/mt for 62% grade ore in global markets, forcing Chinese buyers to scale down imports from India amid a rise in export duty from 20% to 30%. In 2012-2013, India’s contribution to Chinese iron ore supply dropped from 6% to below 2% due to higher prices. The rates are currently hovering around $120/mt-$122/mt at Indian ports.

Besides iron ore fines, pellet exports are picking up from Odisha, which has large capacities of pellet production. Though the amount of conversion of fines into pellet is lower in Odisha in comparison with generation of fines, recently it has gone up as some firms have shown interest in producing pellet. At present, Jindal Steel and Power Ltd., Brahmani River and Pellet Ltd., Essar Steel, Bhushan Steel and Power Ltd., and Adhunik Metaliks are engaged in production of pellets with a combined annual production capacity of 20 million mt. Pellets are produced from dusty iron ore fines and are used as raw material for steel production. They can be used in place of sized iron ore in blast furnaces and are priced higher than fines.

Ignorance is No Protection from the Application of General Average
While general average is a term with which many transportation professionals are familiar, it is a subject worth reviewing in light of new exposures that may fall within it. If one expects to play an important part in exporting coal, do not plan on the “protection of ignorance.” One should act as if their job depends on their knowledge of it, because in a very rare instance, it might.

Vessels on the high seas are subject to the general average concept, which dates back to the ancient mariners. Under these terms, not only are ocean carriers not liable for loss or damage to cargo, but the cargo owner is actually responsible, in part, for the cargo of others, as well as the ship itself. This could be a sobering concept, especially for the guy who took no part in negotiating the charter.

General average arises when a sacrifice or expenditure is intentionally made or incurred in time of peril by one of the parties to the adventure, not for his own benefit, but for the benefit of all concerned in the enterprise, including the ship, cargo and freight. The classic example of a general average sacrifice is jettison to lighten a stranded vessel. Jettison is the throwing overboard of cargo of ship’s material, equipment or stores. Most general averages are caused by stranding, fires, collisions, or when a vessel is engaging in salvage assistance, or putting into a port of refuge due to an accident during the voyage.

When general average is declared, the owners of the vessel and cargo are required to absorb a proportionate share of the loss to compensate the owner of the vessel and/or cargo that was singled out for the sacrifice. All participants in the maritime adventure contribute to offset the losses incurred, at an amount set forth by the average adjusters. The object of a general average adjustment is to place the parties to the adventure in the same positions, regardless of which of them initially sustained the loss or incurred the expenditure.

The basis for general average adjustment is customarily established in the contract of affreightment, which usually states that adjustment will be made according to the rules of a certain port, or if that port or country lacks jurisdiction, according to the York-Antwerp Rules. The potential financial loss from general average exemplifies the importance of cargo insurance, even for shippers of low-value merchandise. Without All Risk or Free of Particular Average (FPA) cargo insurance, cargo owners would be forced to post a cash deposit with the vessel owner to have the cargo released. This deposit would likely be tied up for two or more years until the general average adjustment was completed.

Every shipper should have cargo insurance, even if they think their cargo does not have a value worth covering. The liability for general average makes purchasing cargo insurance an essential business decision. The American Institute for Marine Underwriters reports a decline in total loss figures in 2009, compared with 2008, and that is probably attributable to the continued slack of volume overall. According to the International Union of Marine Insurers (IUMI), the number of losses is likely to rise as the year progresses.

One issue that continues to escalate is piracy, and in particular, piracy off the Somali coast. The International Maritime Bureau reported that piracy attacks increased from 114 in just the first six months of 2008 to 240 during the first six months in 2009. While most cargo insurance policies will cover loss or damage to cargo stemming from piracy, there is concern as to whether ransom payments made to pirates are illegal, and, moreover whether the vessel and cargo insurers contribute to an “illegal” activity.

Worldwide, anti-terrorism laws prohibit payments to groups tied to terrorism, and while there is no link between piracy and terrorism now, this continues to be an open question.

On April 13, 2010, President Barack Obama issued an executive order preventing U.S. citizens and entities from making payments to certain named individuals, and there is also the potential to prevent any payments to individuals or groups involved in or supporting piracy in Somalia. This executive order has spurred several questions and the Lloyd’s of London Joint Underwriting Committee is seeking clarification. While it is generally agreed that piracy ransoms fall within the scope of general average, the debate over ransom legality will ultimately be the deciding factor in how insurers will respond. So while general average may seem like an antiquated piece of maritime law, it is a dynamic vehicle that allows for a fair and equitable division of costs attributable to saving a voyage.

One should learn all they can about general average so they have a feel for the risks they may face, however rare the occasion may be. Every exporter should have a general average conversation with a maritime attorney annually. It is no different in concept than the attorney’s admonition about conflict of interest at the outset of every meeting: it may seem like wasted words, but it also may save one or more people.


Dave Gambrel is a transportation consultant and writer. He has chartered more than 50 coal vessels of Panamax or Capesize capacity. He was a member of the Commercial Panel of the American Arbitration Association from 1980-1998. He may be reached at bunkgambrel@earthlink.net.