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Current commercial realities for the salvage industry

Salvage and Wreck London 06 – 08 December 2017

Charo Coll, President ISU 

Commercial pressure, ISU statistics and changes in contracting

The latest available statistics from the International Salvage Union are from 2016 and the numbers for 2017 will not be available until the end of the first quarter next year. The 2016 statistics remind us that, for ISU members, salvage is a variable business.

It is now well-known that total gross revenue for ISU members from emergency response and wreck removal in 2016 was significantly reduced at US$380 million. That is a fall of some 50% compared with the previous three years.

I do not think we can say for sure that our industry has entered an era of permanently depressed incomes but it will be interesting to see the 2017 figures and to analyze new trends.   

There is much commentary on why revenues have fallen. In part it may be from oversupply of capacity from both traditional salvors and additional capacity offered by non-traditional salvors, such as the under-utilized offshore sector.

At the same time, the number of major jobs has also decreased in line with improved ship quality, training and aids to navigation. Property values may be down and the past few years has seen a constriction in world trade.

ISU members are therefore faced with the triple jeopardy of over-supply; weaker demand – certainly for major jobs – and lower values. And we see contractors prepared to do work in ways that, in the short term, may be less costly for insurers but which may, in the longer term, come at a price to the owners and insurers.

On individual jobs, different ways of contracting may load up the owner with more risk and, longer term, if there is a flight of quality from this industry there is the possibility that expert services will not be available when needed most.

LOF issues – side letters, capping

It is ISU policy to support the traditional and long-standing Lloyd’s Open Form (LOF) salvage contract. Most of us are aware that the use of LOF has declined steadily over the years.  The number of LOF cases that realized revenue in 2016 for ISU members was just 34 which is the lowest since 2003. Correspondingly, LOF income was down to US$69 million.  This is an average of just over US$2 million per LOF. Emergency response services carried under alternative contracts generated revenue of US$75 million. There were far more cases carried out on these terms and so the average is some US$280,000 per case. 

2017 will certainly produce more LOFs but the days of 100 or more LOFs each year are long gone. ISU is also aware that some LOFs these days have so called “side letters” or agreements attached to them. These might include, for example, a “cap” on salved values or an agreement to calculate the salvage award based on day-rates for equipment. The salvor still carries the same amount of risk but for a reduced reward and that is not fair or balanced. ISU policy is to encourage the use of un-amended LOF but contractors make their own commercial decisions.

This behaviour seems to be caused by a willingness on the part of contractors to secure what work they can get even on reduced terms and an unwillingness on the part of owners and insurers to commit to LOF.

Impact on ISU members

The ISU currently has 58 full members from 32 countries. All full ISU members must have experience of taking on salvage contracts as lead contractor and demonstrate a good track record in salvage or wreck removal.  Some are more active than others. Of the 58 ISU members, a relatively small number, less than 10, operate truly internationally. The majority of ISU members are regional salvors and there are four state-owned salvors.

The current salvage market affects ISU members differently. Firstly, state-owned salvors tend to be insulated from commercial pressures and the decline in emergency response and LOF cases. Governments have chosen to maintain a domestic salvage capability regardless of market conditions and usually operate a system which makes it difficult for other salvors to undertake salvage work in their territorial waters.

Regional salvors form the biggest group within the ISU membership.  Many of them work willingly with the international salvors, supporting their operations with floating plant, equipment and personnel.  For most regional salvors, salvage is not their core business which tends to be harbour, terminal or offshore towage and support, or other marine contracting activity. The decline in emergency response and LOF work has a proportionately smaller effect on them.

The larger, international salvors have undoubtedly suffered. They carry the biggest inventory of all kinds of equipment and personnel and consequently have higher fixed costs that enable them to offer greater reach and technical capabilities.  They are the leaders of the industry that shipowners and their insurers may rely on when there is a major casualty. And it is this group that society relies on around the world to prevent catastrophes. And for this reason, and in order that the number of international salvors should be sustained to provide services worldwide, they should receive more support from insurers and shipowners.

Partnership and trust

Most ISU members want to be partners with the insurance industry, not adversaries. I believe there has been too much “them and us”.  There has been suspicion on both sides. Contractors feel that insurers are driven too much by price and exploit market conditions at the expense of the salvor. No doubt insurers think that contractors try to get as much as possible from the job.

We know that marine property insurance is a difficult business and that marine underwriting premium income for IUMI members fell by 9% last year. I am sure Dieter Berg will be saying more on this in the next twenty minutes, but the vice chair of IUMI’s Facts and Figures Committee noted at its Tokyo conference that the downward trend in premium income “leads to an increasing mismatch between income levels and the insurer’s obligation to cover major losses particularly in light of the trend for larger vessels.” This is exactly where salvors should be positioned – as partners to help prevent or mitigate loss from casualty vessels.

Relations between the P&I Clubs and salvors have not been as good as they should be over the last year. SCOPIC is generally thought to have worked well since its introduction but it seems to have become contentious. There are reports of liability insurers pressing contractors to agree reduced rates and uplifts. That is against the terms of the Code of Practice between ISU and and the International Group of P&I Clubs and is not fair or right. And the Clubs might say they have reports of contractors not behaving properly – if that is the case it should be reported to ISU to investigate. 

All parties need to cooperate on a salvage operation and it should be the same when we negotiate industry-wide matters on dry land. Current issues regarding changes to SCOPIC need to be resolved and recent discussions have been more positive. ISU wants to work constructively with the Clubs and we therefore look forward to further improvement in the relationship and satisfactory conclusion of the key issues.  

The value of ISU members 

Willingness to take on risk

The traditional salvor – a typical ISU member – has a willingness and ability to take on the financial risk of a salvage job under the “no cure, no pay” model. During a major operation the salvor might be carrying many millions of dollars of risk and financing the job from his own resources including the costs of any sub contractors. The trade-off is that LOF awards should include an additional element of “encouragement” to recognize the value of supporting the availability of salvage cover.

Under most commercial terms, the risk is not carried by the salvor and the owner may be required to pay substantial sums at short notice with a possible impact on cashflow. It is a matter not often noted but is nevertheless a major benefit.

Own equipment and personnel 

Price should not be everything. Quality and experience are critical and ISU encourages the use of contractors – like its members – who have their own equipment as well their own professionally employed, experienced staff.

A quickly chartered AHTS may be capable of a salvage job but has its crew got the necessary experience? Does it carry the necessary towing equipment? Is it safe for an inexperienced crew to engage in opportunistic salvage simply because the vessel was available, close by and relatively cheap? And without the contactor bearing the financial risk? What if the effort is unsuccessful or makes the situation worse? These should all be important considerations for owners and insurers.

In the last two years we have seen cases where giant containerships have grounded in the approaches to busy European ports.

This summer, Multraship Salvage and URS (part of Kotug-Smit) refloated the stranded 14,000 teu CSCL Jupiter on the River Scheldt which was obstructing traffic going into and out of Antwerp. 

Last year the CSCL Indian Ocean grounded in the River Elbe upstream from Hamburg and was refloated by Smit and Kotug using multiple assets.

These incidents highlight the potential for large casualties to cause prolonged blockages of major ports leading to severe economic consequences, to say nothing of the potential for pollution and economic loss to cargo and hull interests. A major marine property insurer has already identified the possibility of the $2 billion loss.  In these cases the quick and effective response of professional salvors averted the risk and made critical work look deceptively easy.

Firefighting on large boxships

Fire on containerships is also an important subject. And a subject which IUMI feels strongly about. It has recently published a new position paper about this matter noting the grave risks to crew, cargo and vessel.

IUMI calls for improvements in detection, protection and firefighting capability as well as cargo declaration. ISU members are often the only agency available to deal with these incidents and there have been many examples of brave efforts going back to the Hyundai Fortune, MSC Flaminia and more recently the CCNI Arauco and the MSC Daniela. It is an area of specialty for traditional salvors and ISU supports IUMI in its work on this issue.

Other issues

There is not time to explore all of the current issues in salvage today but I must make a reference to the continuing importance of wreck removal as a source of income. With that comes the importance of fair tendering and contracting and fair recognition of, for example, the risk of unforeseen delays.

ISU also has concerns about the role of Quantitative Risk Assessment in tendering for major projects. We know it is in use but there are several different proprietary systems; data input is onerous and there are concerns about ownership and subsequent use of data. These are all points to discuss with other parties.

Conclusion

Despite lower revenues, salvage is still a vibrant industry and ISU expects that to continue.

There is more diversification but we cannot eradicate risk in shipping and somebody has to be prepared to offer services in casualty situations which will save life; protect the environment and save property. ISU members are best-placed to do that.

Vessel size may not grow exponentially now but the number of very large ships will increase and the value of property on containerships will rise. The coastal state authorities will not soften their attitudes to the threat of pollution and their requirements for the treatment of wrecks will be just as demanding. There is, therefore, an enduring requirement for a strong and technically capable salvage industry. ISU members still invest in their equipment and in many cases are the best partner to prevent or minimize loss to insurers and owners.