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Do Pirates Have a Knack for Timing the Market?

Justin Rohrlich August 6, 2010 3:20 PM|

       Yesterday's hijacking of 23,755 cubic meters of sugar says they might be smarter than we give them credit for.

The Syrian-crewed MV Syria Star, flagged in Saint Vincent and Grenadines and transporting an estimated 23,755 cubic meters of sugar, was seized by Somali pirates in the Gulf of Aden yesterday.

The pirates seem to have timed the market fairly well, after raw sugar futures for October delivery on the ICE (ICE) exchange hit a four-month high of 18.52 cents/lb. this week. Apparently, it's due to a logjam at Brazil’s ports (Brazil is the world’s largest sugar exporter), where ships are waiting up to a month and a half to load supplies and set sail (the usual time is about two weeks).

Usually, pirates are after ransom, not cargo—but they tend to target high-value shipments. This time, they’re headed back to shore with 23,755 cubic meters of deliverable sugar, currently trading at a spot price of 24.37 cents/lb. A quick back-of-the-envelope estimate shows that 23,755 cubic meters would accommodate approximately 53,247,825 lbs of sugar—with the right broker, they could do quite well.

The probability of the pirates’ purloined sugar entering the market is low, to say the least. However, even if they were able to sell it, money manager Shawn Hackett, founder and CEO of Hackett Financial Advisors, a firm with a focus on agricultural commodities, contends they got in too late.

“There’s no scarcity of sugar,” he tells Minyanville. “This is just a temporary, short-term rise in sugar prices because of the transport problems Brazil is having. That’ll get resolved quickly, and besides, India, the other sugar-producing country the world relies on, just came in with a record-setting crop.”

So, the pirates may have been better off just going the ransom route, as is their usual MO.

Container vessels generally sail too high off the water for Somali pirates and are relatively fast. Thus, tankers and dry bulk ships that carry oil, chemicals, coal, wheat, and other commodities are more desirable targets.

The Saudi-owned Sirius Star, was hijacked in November, 2008. It was carrying two million barrels of oil worth $100 million, and was finally released on January 11, 2009, after $3 million in cash was dropped to the pirates from an aircraft. It was the highest-ever ransom paid, at the time.

Then, about a year later, pirates hijacked the New Orleans-bound tanker Maran Centaurus, which was carrying 2 million barrels -- $150 million worth -- owned by Valero Energy (VLO). In January, a ransom estimated to have been between $5.5 and $7 million dollars was paid, again, dropped by parachute from a helicopter.

Pirates know that the value of the ship and its cargo are usually worth far more than their ransom demand, and a few million dollars is a drop in the bucket (barrel?) in relative terms.

So, how does it work?

Let’s say you own a tanker or the cargo it’s carrying. In the event of a pirate attack, the vessel’s crew contacts company headquarters, which in turn, contacts its insurance company, which in turn, contacts a security firm like London’s Control Risks, which begins negotiations with the hijackers.

"Paying ransoms is not illegal," Guillaume Bonnissent, a special risks underwriter for Hiscox Insurance Co. Ltd, which writes about two-thirds of the world's kidnap-and-ransom insurance policies, told Time magazine. It is, however, illegal for insurance companies themselves to pay ransoms, which is why Control Risks and others make the payments. "K&R is really reimbursement," Bonnissent said. "We reimburse clients for ransoms paid."

"The money is concealed in large floating plastic containers, and flown by air and dropped," says Mike Regester, an insurance broker for Cooper Gay. "Then the pirates go out and pick it up," he says.

As the pirates know ships are generally required to carry K&R coverage for navigating through Somali waters, they know they'll be paid -- unless they're caught first by the international naval fleet protecting the shipping lanes. But last year, 68 successful hijackings were carried out in 200 attacks, netting total ransoms believed to exceed $50 million.

Somali pirate hijackings are financed by what may well be the world’s most unusual “stock market.”

A pirate named “Mohammed” said that, in Haradheere, 250 miles northeast of Mogadishu, brigands set up an exchange of sorts to fund their activities.

"Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 'maritime companies' and now we are hosting 72. Ten of them have so far been successful at hijacking.”

He explained that, "The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials."

After a ransom payout for releasing a Spanish vessel, “investor” Sahra Ibrahim, was lined up outside the exchange waiting for her cut.

"I am waiting for my share after I contributed a rocket-propelled grenade for the operation," she said.

"I am really happy and lucky. I have made $75,000 in only 38 days since I joined the 'company.'"

Not bad, considering how she would have done had she invested her RPG in JDS Uniphase (JDSU), Cisco (CSCO), or Lucent (LU) in, say, February, 2000.

They hijacked investors’ money -- and, to my knowledge, no airdrops have yet been scheduled to reimburse them.

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