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An assessment of the current state of the marine salvage industry

ITS 2018 Marseilles 27 June 2018

Charo Coll, President, International Salvage Union

Introduction

I am very grateful to the organisers of ITS for giving me the opportunity to update you on the current state of the marine salvage industry.

In my talk this morning I am firstly going to discuss some of the current operational issues facing the industry. I shall then move on to present to you the latest set of industry statistics. These have not yet been published and today is the first time they have been shown publicly. I will then consider the implications of these statistics; the economics of the industry and the relationships between the key players.

Structure of the industry

Before I talk about current operational issues I will remind you of the structure of our industry. Globally there are, of course, many organisations that are willing to provide salvage services. These include large international operators working worldwide; medium sized regional operators and much smaller firms working in a single territory. There is also a mix of corporate ownership models. Some salvage companies are units of large marine and industrial groups and others are privately owned. There are also some state-owned salvage providers and their influence in some territories is growing.

Then we have marine consultants who do not have their own equipment but are willing to conduct salvage operations by putting together a package of resources for individual jobs. And there are those who are simply ready offer services if the opportunity presents itself.

The International Salvage Union is the global trade association for marine salvors and it has 57 full members from 32 countries. Full members must be marine salvage operators with a proven track record as a main contractor delivering salvage services. ISU also has some 86 Associate and Affiliated members.

Current operational issues

The new ISU statistics will be of great interest, but before I turn to them I would like to give you an update on current operational issues.

Fire on containerships is an important and worrying matter. ISU members are often the only agency available to deal with these incidents and there have been many examples going back to the Hyundai Fortune, MSC Flaminia and more recently the CCNI Arauco, MSC Daniela and, earlier this year, the Maersk Honam. It is an area of specialty for traditional salvors.  IUMI has publicly stated its concern about this issue and is working to see changes in containership design and operation to improve fire prevention and fire safety. These kind of incidents often cause fatalities and, sitting in our air conditioned offices, it is easy to forget the horror and danger presented by fire at sea.

Two further issues of concern are ensuring the correct weight of containers is noted and the declaration of their contents is correct. Both of these have major safety implications and can put salvage crews at great risk. ISU has commissioned its Salvage sub-Committee to consider these issues and report to the ISU Executive Committee with its suggestions.

No discussion of current issues in shipping would be complete without noting autonomous and remotely operated vessels and cyber security. ISU has developed a position paper on this topic and it will be published soon.

Our position is that ISU members want to support ship owners and their technical innovations including autonomous ships. Salvors have supported the transition from sail to steam to diesel and from flags to radio to satellite communications and they will continue to offer much needed services regardless of the technological context.

Autonomous ships must be made to be at least as safe as existing shipping – and addressing the cyber threat is critical to successful introduction – but they will not remove the potential for marine casualty. ISU anticipates considerable technical challenges in salving autonomous ships: communications, boarding, making connections and taking local control of the vessel, for example.

Salvors need to be involved in design, training and operational planning in order to ensure that autonomous ships, and their operators, are “salvage ready”. The goal should be that providing salvage services to an autonomous ship is no more difficult than for a traditional vessel.

The final operational matter to report is the continuing requirement for better international performance on places of refuge. We know that good progress has been made in the European Union but many coastal states around the world still do not meet their obligations regarding places of refuge. The European Union, supported by industry including the ISU, is in the process of asking IMO to review its own Guidelines on Places of Refuge in an effort to achieve some consistency of national response whenever a Place of Refuge is requested.

ISU statistics 2017

Now I am going to turn to the ISU statistics for 2017. The statistics provide the only published measure of the state of the industry. They are collected confidentially from all ISU members, aggregated and analysed by a third party. They do not include the revenues of non-ISU members. The statistics are for income received in the relevant year but that can include revenue from services provided in previous years. They are gross revenues from which all of the salvors’ costs must be met.

Gross revenue for ISU members in 2017 from all activities was US$ 456 million. It compares with US$ 380 million in 2016 and that is a 20 percent increase but still far from the US$ 717 in 2015.

The total number of “dry salvage” services (emergency response as opposed to wreck removal) in 2017 was 251. In 2016 there were 306 operations – but that was the highest number for nearly 20 years.

So, we see an industry that has recovered a little from the low point of 2016 but which is still nowhere near the levels of 2013, 2014 and 2015 when total revenues were more than US$ 700 million.

Revenue from Lloyd’s Open Form (LOF) cases in 2017 was US$ 54 million which is the lowest since 1999 and continues the downward trend of LOF. Revenue from SCOPIC was US$ 20 million – down from some US$ 60 million the previous year and the lowest annual SCOPIC revenue since SCOPIC was introduced in 1999.

The number of LOF cases that realised revenue in 2017 for ISU members was 46 – an improvement on the 34 cases in 2016. However, with the increase in cases and decrease in LOF revenues it obviously means the average revenue from each LOF case, including SCOPIC revenue, has fallen and was US$ 1.6 million, down from US$ 3.9 million the previous year.

The total of LOF salved values was nearly US$ 1 billion and the average LOF salved value was US$ 21 million. It means that the average income for each LOF case – this includes both settlements and arbitrators’ awards – was 5.6 percent of the salved value (excluding SCOPIC payments) – the lowest on record.

Revenue from LOF cases represented 31 percent of the total of all “dry” salvage revenue and is a continuation of the decline. When you consider that just ten years ago, LOF revenue represented more than 70 percent of “dry” salvage income it dramatically shows the declining financial significance of LOF. That is confirmed by the number of LOF cases being just 18% of all “dry” salvage cases in 2017.

At the same time, revenue from operations conducted under contracts other than LOF was US$ 119 million – up from US$ 75 million.  Average revenue from non-LOF contracts was therefore US$ 580,000.

These statistics reflect the continuing trend for commercial contracts to be used in place of LOF.

Wreck removal income has grown during the past decade and is an important source of income for members of the ISU. In 2017, 120 operations produced income of US$ 264 million – which is 58 percent of total income. It is an increase from US$ 172 million in 2016.

The 2017 ISU statistics therefore again show the variability of our industry. Yes, the total of US$ 457 million was a 20 percent increase in gross revenues on the previous year but that is still more than 30 percent down on two years before.

The forces of competition may be making salvors undertake cases for much lower returns and there may be pressure from owners and insurers to drive down costs.

LOF issues

The LOF salvage contract remains important to the shipping, insurance and salvage industries but, despite the pick up in cases in 2017, the overall picture is very different from 20 years ago when there would typically be more than 100 LOFs each year. And, critically for salvors, the revenues earned from LOF have declined significantly.  

The reasons behind the decline in the use of LOF could be that shipowners and their insurers think the contract is expensive to use and it is too generous to salvors. There may also be a lack of understanding in the insurance community about the contract and its benefits. And fierce competition means that contractors are more prepared to work on commercial terms in order to secure the job.

ISU promotes the use of “unamended” LOF but there has been a growing trend for LOFs to be accompanied by so called “side agreements”. Their main purpose is to reduce the LOF award by altering the terms of LOF, for example by “capping” the award or linking it to tariff rates for the equipment used.

Despite the decline, ISU continues to promote the benefits of LOF. It is a clear and simple contract which enables rapid intervention in an evolving casualty situation.

Rapid intervention can prevent a bad situation becoming worse and can therefore prevent additional damages and liabilities from maturing. It is a fair contract and most cases are settled amicably but there is a clear dispute resolution process using Lloyd’s Arbitrators.

Critics of LOF often neglect to acknowledge that commercial contracts can turn out to be more expensive than a LOF. For example, if the job turns out to be easier than anticipated when the contract was agreed, LOF would correct the remuneration downwards in such circumstances.

LOF clearly places the salvor in charge of the operation and they must use their best endeavours to save life, property and prevent and minimise damage to the environment. If other terms are used, responsibility and coordination may be less clear. Other parties, such as property interests, owners and liability insurers may have differing objectives and will not have the technical expertise to control the job.

In short, it is in the shipowners’ and insurers’ interests to contract a difficult job to an experienced professional who has invested in the necessary personnel and equipment and who will bear the financial risk of the operation upfront.

Competition and the current commercial context

Increased competition is a recurring theme and there is undoubtedly strong competition for salvage and wreck removal work. There is competition between ISU members and increasingly from other organisations who are not members of the ISU and who are not experienced salvage contractors.

Competition between ISU members has always been a feature of the salvage market and is to be encouraged. The industry has not contracted as much as might have been expected given market conditions and nor has there been much consolidation. This has led to over-capacity of supply in some parts of the world. Furthermore, the offshore sector has been depressed for a number of years with a large number of assets – including powerful anchor handlers – available for other work including marine salvage.  

And there is more contracting with consultancies which do not have the overhead of their own vessels and salvage gear.  Depending on the contract used, such an approach leaves the owner and insurer exposed to the full risk of the job. Traditional salvors are frustrated by this approach and justifiably concerned that it could erode the experience and capacity of the salvage sector leading to a reduction in the ability of the industry to respond to complex cases.

Two further factors affect the market significantly at present. The first factor is barriers to entry in some key locations. The second factor is the behaviour of the insurance community.

Underwriters undoubtedly need high quality salvage contractors to help prevent or at least minimise loss. And yet members of the ISU have reported that increasingly insurers appear to be driven more by reducing the cost of salvage services and they put this ahead of considerations such as experience, high operational standards and ownership of reliable equipment.

ISU knows the property insurers have experienced difficult conditions for many years. And ISU members must, of course, react to the changed requirements of the demand side of its industry. At the same time, ISU is concerned with the apparent disregard for operational certainty, risk mitigation, appropriate insurance covers and the general professionalism that established salvors offer beyond the fact that they have their own equipment and teams.

In short, it seems as if the property insurers are careless about the possibility of inexperienced salvors making the situation worse or extending its duration and possible risks.

Wreck removal 

Let us now look at wreck removal. The cost of major wreck removals has risen in recent years driven, according to research by the International Group of P&I Clubs, by the demands of the coastal state authorities.

ISU members are often the only contractors with the required levels of experience, equipment and capability to perform safe and clean wreck removals which always contain a degree of uncertainty. Traditionally, wreck removal contracts recognised this and allowed for a degree of risk sharing between the insurer and the contractor.

The BIMCO suite of wreck removal contracts was reviewed largely at the request of the P&I Clubs following cases such as the New Flame and MSC Napoli and the revised contracts have been successful. The principle of “shared risk” is enshrined in the contracts.

However, ISU members have reported recent episodes in which the insurer has sought to transfer most, or all, of the risk to the contractor often by the deletion of Clauses 4 and 7. It reflects a push towards true “lump sum” contracts.  ISU believes that is not fair especially when there seems to be no compensation for the transfer of more risk. It is in the entire shipping industry’s interest that there should be a competitive and capable range of contractors able – and willing – to bid for wreck removal work which this kind of approach may undermine. The balance sheet requirement to take very large risks may well be beyond all but the biggest contractors.

Furthermore, in the past, established ISU members used to partner from time to time on larger wreck removal operations. This was to share assets, to share risk and also could be at the client’s request. We have now seen examples of project-specific partnerships between general marine service providers and enthusiastic newcomers for wreck removal. ISU does not want to prevent competition but it questions whether these kind of combinations really have the necessary operational ability, financial stamina, necessary liability cover, dispute arrangements and so on and the lack of which could make the shipowner and Club more exposed than before.

Indeed, the overall approach to wreck removal contract tenders and negotiations by the Clubs has become combative rather than cooperative which is not right.   

An additional concern in wreck removal is the introduction of Quantitative Risk Assessment (QRA). In principle, ISU accepts the value of some use of QRA but we think more work and engagement is needed before it can be implemented widely.

Conclusion

That is, I hope, a comprehensive update on the state of our industry and, to conclude, these continue to be commercially challenging times for traditional salvors.

Use of the Lloyd’s Open Form contract has declined and ISU members are faced with the “triple jeopardy” of fewer major jobs; reduced income and more competition, including from consultancies and other non-specialist providers. There are many operational challenges and in wreck removal, fair sharing of risk is threatened. It is hard to escape the conclusion that the balance has swung too much in favour of shipowners and insurers. Of course the ISU wishes to protect its members’ interests and is not dispassionate but it believes there is a real threat to the long term provision of successful services from experienced salvors with strong operational track records and control of their own experts and equipment.