Maritime Terrorism Could Have Global Economic Impact

Article

Singapore said on Friday it had raised alert levels in the city-state and beefed up security at its airport and new casino resorts after a warning of possible attacks on oil tankers in the Malacca Strait. [See IJ web site – https://www.insurancejournal.com/news/international/2010/03/05/107890.htm

Reuters Asia political risk correspondent, Andrew Marshall, examined the potential threats as follows:

How much economic damage could maritime terrorism inflict? Economic warfare is a central tactic of terrorism. But financial markets tend to be resilient in the face of attacks.

From the hijacked airliner attacks in the United States on September 11, 2001, to the suicide blasts at nightclubs in Bali in 2002 and the Madrid and London train bombings of 2004 and 2005, markets tend to react in a highly consistent pattern.

Domestic equities, bonds and the local currency suffer a knee-jerk sell-off. Risk appetite drops sharply and there is a swift flight to quality, with investors seeking the sanctuary of U.S. Treasuries, and sometimes selected commodities and gold. But within weeks — and usually days — asset prices recover.

A maritime attack, however, could have magnified consequences if it caused significant disruption to a key shipping lane like the Malacca Strait or a major port like Singapore.

This is because while specialization in global supply chains has brought significant efficiency gains, it has also brought vulnerability. Disruption to a key node in the supply chain can cause dramatic and unpredictable turbulence in the whole system.

That was why global semiconductor prices nearly doubled following an earthquake that hit Taiwan in 1999, and why Hurricane Katrina spread turbulence throughout world markets.

“A major terrorist attack that closed a port … for weeks would have severe economic consequences on world trade because it would inflict major disruptions in complex just-in-time supply chains that comprise the global economy,” the World Economic Forum said in its Global Risks 2010 report, released in January.

In a research paper for RAND, terrorism risk analyst Peter Chalk said: “Maritime attacks offer terrorists an alternate means of causing mass economic destabilization.” Disrupting the mechanics of the global ‘just enough, just in time’ cargo freight trading system could potentially trigger vast and cascading fiscal effects, especially if the operations of a major commercial port were curtailed,” he added.

The Strait of Malacca between peninsular Malaysia and Sumatra is among the world’s busiest shipping lanes, used by more than 70,000 ships in 2007. Up to 80 percent of China’s oil imports and 30 percent of its iron ore imports, and 90 percent of Japan’s crude oil imports, pass through the Strait.

Any attack could also have a big impact on shipments of some major commodities from Sumatra, Indonesia’s main producing island of palm oil, rubber and coffee.

Singapore is the world’s top container shipping port and biggest ship refueling hub. And because of the central importance of Singapore’s port to its economy, an attack that shut it down even temporarily would have a major negative impact on local stocks and the Singapore dollar.

Markets would suffer even if the mere threat of attack led some shippers to avoid Singapore. The 2002 suicide bomb attack on the French supertanker Limburg led to a tripling of war risks premiums levied on ships calling at Aden — and a 93 percent drop in container terminal throughput there.

Piracy in the Malacca Strait became so serious a decade ago that in 2005 the Joint War Committee of the Lloyd’s Market Association added the area to its list of war risk zones, sending premiums sharply higher. The decision was reversed in 2006 following lobbying from Singapore, Malaysia and Indonesia.

How vulnerable is shipping to terrorist attack? Very. Shipping presents a soft target, particularly after global airline security was massively tightened following al Qaeda’s use of hijacked planes as flying suicide bombs in its attacks on the World Trade Center and Pentagon in September 2001.

Perhaps the main vulnerability is the ease with which large, slow-moving oil tankers and cargo ships can be targeted by fast explosives-laden dinghies or speedboats in suicide attacks.

Thursday’s first warning from the Singapore Shipping Association noted: “In past cases of successful terrorist attacks on tankers, smaller vessels such as dinghies and speedboats were used. Analysis of past incidents of sea robberies and piracy in the Malacca Strait has also revealed small fishing vessels such as sampans were used to board victim ships”.

Al Qaeda has launched or planned several seaborne attacks in the past decade — notably the suicide bombing of the USS Cole in 2000, which killed 17 American sailors, and a similar attack two years later on the Limburg, which killed one crewman and spilled 90,000 barrels of oil into the Gulf of Aden.

The ease with which Somali pirates have been able to board and hijack large vessels — including an oil supertanker in 2008 — has also raised concerns of another kind of terrorist attack in which a ship is commandeered and turned into a “floating bomb” that could shut down a major shipping lane or destroy a port.

How credible is the “floating bomb” scenario? Analysts say fears that terrorists could detonate ships carrying crude oil or liquefied natural gas (LNG) are overdone. Crude is not very flammable and LNG carriers are robustly constructed and include significant safety features. They might be easy to board, but not to convert into a weapon quickly.

Ships carrying ammonium nitrate are a bigger concern — the fertilizer is highly explosive when mixed with fuel oil and was used in the Oklahoma City and Bali bombings. Significantly, Thursday’s warning issued in Singapore said that while oil tankers were the probable target, “this does not preclude possible attacks on other large vessels with dangerous cargo”.

When a fire detonated around 2,300 tons of ammonium nitrate aboard a vessel in Texas City’s port in 1947, the blast caused a 5-metre tidal wave that swept through the town. At least 567 people were killed and more than 5,000 injured. Hundreds of homes were destroyed and two small planes were blown out of the sky. It was the worst industrial accident in U.S. history.

(Editing by Paul Tait