An overview of the international marine salvage industry
Peter Pietka, Executive Committee Member, International Salvage Union
I am grateful to the organisers of the 10th China International Rescue and Salvage Conference for giving the International Salvage Union an opportunity to discuss, in such an important market as China, the current state of the international marine salvage industry. Chinese commerce and shipping are of increased importance globally and Chinese salvors are growing in confidence and capability and willing to operate further afield. This is a market to be taken very seriously and ISU is proud to have had senior figures from China Rescue and Salvage as Executive Committee members for many years.
This morning I will first consider the most recent ISU statistics and their implications. I will then move on to consider commercial issues and the positioning of the salvage industry before outlining the current operational issues that the industry is facing.
Structure of the industry
Before we look at the salvage industry statistics, we should first refresh our understanding of the structure of our industry. Globally there are, of course, many organisations that are willing to provide salvage services. These include a small number of 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 is growing in some territories.
In addition, there are marine consultants – sometimes well-resourced consultancies and sometimes a single player. These consultants do not have their own equipment but are willing to conduct salvage operations by putting together a “package” of people and hired-in assets for individual jobs.
And, as throughout history, there are those operators or passing vessels 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, including China Rescue and Salvage which is also represented on our executive committee. Full ISU 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. Membership of the ISU should give confidence to other parties that they are dealing with reliable, experienced contractors.
ISU statistics 2017
The best way to consider the state of the industry is to look at the ISU statistics for 2017 which provide the only published measure of the performance of the industry. The numbers 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. It is important to note these are gross revenues from which all of the salvors’ costs must be met.
The total number of emergency response services in 2017 was 251. In 2016 there were 306 operations which was the highest number for nearly 20 years.
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.
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 consistently 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.
The number of LOF cases that produced revenue in 2017 for ISU members was 46 – an improvement on the 34 cases in 2016.
Revenue from LOF cases represented 31 percent of the total of all emergency response revenue. Only ten years ago, LOF revenue represented more than 70 percent of emergency response income – it demonstrates clearly the declining financial significance of LOF.
At the same time, revenue from operations conducted under contracts other than LOF was US$ 119 million – up from US$ 75 million.
These statistics reflect the continuing trend for commercial contracts to be used in place of LOF. 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. Traditional LOF has great benefits – it can be very quickly agreed, the risk is all with the salvor who must use best endeavours and who is fully in control of the operation. It is fair to all parties and there is an established arbitration process.
Reported 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. But some of this could be due to use of wreck removal contracts in emergency response situations – not all of this revenue may be from true “wet” salvage operations.
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. It is difficult to conduct business planning and to make investment decisions in the face of such volatility. The early showing is that this year, 2018, the market in emergency response has continued to recover in line with the recovery of the wider shipping sector. We shall have to wait to see whether this is a trend.
Competition and the current commercial context
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 – particularly south east Asia. 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 equipment. 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 around the world. There may be political or historical or geographical reasons why that is the case but members of the ISU seek a fair opportunity to compete for work wherever their services might be needed which is wherever there is shipping.
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.
Positioning of the industry
The LOF statistics that I have described clearly show that “traditional” salvage provision is unlikely to provide enough revenue to sustain a salvage business in the current environment and ISU does not see that changing. Today there are almost no commercially operated salvage tugs kept “on station”.
The LOF contract is unlikely to return to historic levels and ISU members often contract in different ways and also need to find other revenue streams. Many undertake major marine projects and wreck removals. Indeed, ISU members are often the only contractors with the required levels of experience, equipment and capability to perform safe and clean wreck removals. ISU members are also creative project managers and pollution control experts.
There is no point denying the changes and “clinging to the past” and the ISU Executive Committee has started work on a new vision to try to position the industry in line with the realities of the market.
We want the shipping industry and wider society to understand the value we bring: high standards with creative and innovative solutions; a critical role in protecting the marine environment; the facilitation of world trade – keeping goods moving and keeping ports and sea lanes open. ISU members are there to work with owners and insurers to mitigate risk and reduce loss. We have great experience of delivering major projects. We should not be seen as a “necessary evil” but as valued partners.
Over the coming months ISU will continue to work on these ideas – and associated initiatives – so that as an association we are properly representing the work of our members.
Current operational issues
I would now like to briefly describe some of the current operational issues that the ISU is concerned with.
Fire on containerships is an important matter. ISU members are often the only agency available to deal with these incidents – often with fatalities – and there have been many examples going back to the 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. The International Union of Marine Insurance 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 and ISU supports that work.
Ensuring the correct weight of containers is noted and the declaration of their contents is correct are also important issues with major safety implications.
Safe operations concerning LNG cargoes as well as LNG-fuelled vessels are also on our list of issues.
And no marine conference is now complete without noting autonomous and remotely operated vessels and cyber security. The ISU position is that we 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.
We are also only just beginning to realise the possible impact of blockchain technology on our industry and we need to consider and prepare for how that might change operations, contracting and insurance models.
Arctic operations are of increasing interest as the possibility of routine maritime trade between Europe and Asia via shipping routes in the “high north” becomes ever more likely.
Addressing many of these issues – and the great challenge of salving mega containerships – requires innovation, and therefore investment, at a time, as we have seen earlier in this presentation, when revenues are still depressed.
The final operational matter to report is the continuing requirement for better international performance on places of refuge. We would like the International Maritime Organisation to press coastal states to meet their obligations when a Place of Refuge is requested.
That is, I hope, a comprehensive update on the state of our industry and, to conclude, these continue to be commercially challenging times for 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. And there are many operational challenges. But ISU wants to meet these challenges with a refreshed positioning of the industry and is working to ensure wider understanding of the value added by its members in loss mitigation; facilitation of trade; protection of the environment and project excellence.
We are creative and capable and we know that our services are needed.