An overview of current issues in marine salvage
By Ms Charo Coll, President, International Salvage Union
The latest available statistics from the International Salvage Union (ISU) – the global trade association for marine salvage contractors – are from 2016 and they remind us that salvage is a variable business. Total gross revenue for ISU members from emergency response and wreck removal was US$380 million – that is a reduction of some 50% on 2013, 2014 and 2015. It will be interesting to see if 2016 was a “blip”, or the start of a trend. The ISU statistics can show a “lag” because they are for revenue received in any particular year but that revenue may have come from a job conducted in a previous year especially if it relates to emergency response. However, it is likely that we have entered a “new reality”.
It is well-known that ISU policy is to support the use of the traditional and long-standing Lloyd’s Open Form (LOF) salvage contract. It is also well-known that the use of LOF has declined steadily over the years. The number of LOF cases that realised revenue in 2016, just 34, was at its lowest level since 2003, and 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 which averages out at some US$278,000 per case.
The majority of LOFs these days have so called “side letters” or agreements attached to them. The amendments are varied and 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 and ISU does recognize freedom to contract however parties choose to do so.
Why do salvors agree diminished terms either amended LOFs or commercial terms? One main reason seems to be increased competition among salvors and oversupply of contractors in some locations. There is also a large amount of capacity available from the under-utilised offshore sector.
The salvage industry has been in decline for some years and, regrettably, there has been redundancy and retrenchment among ISU members. There has been much talk about the possibility of consolidation and there has been the merger of Svitzer and Titan to form Ardent two years ago and there have been some other acquisitions and the formation of joint ventures. It remains to be seen whether there will be further consolidation.
The ISU currently has 58 full members from 32 countries. All full ISU members have experience of taking on salvage contracts as lead contractor. Of course some are more active than others. Of the 58 ISU members, a relatively small number operate truly internationally and of those some only operate in emergency response while some do emergency response and wreck removal. 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 unaffected by a decline in emergency response and LOF cases. Their governments have opted to maintain a domestic salvage capability regardless of market conditions and usually operate a cabotage or protectionist system which makes it difficult for non-domestic 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 salvor, 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 will be the salvors that shipowners and their insurers will turn to when there is a major casualty. It is this group that society relies on around the world to prevent catastrophes.
Despite lower revenues, salvage is still a vibrant industry and ISU expects that to continue. The salvage world has gone from a focus of specialization to 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.
Shipping is cyclical and it is possible that in the next period ship and cargo values will rise, trade will increase and correspondingly revenues from salvage will grow even if the number of accidents does not increase. Vessel size may not grow exponentially but the number of very large ships will increase and the value of property on containerships, for example, 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.
It all points to an enduring requirement for a strong and technically capable salvage industry. Finding the balance between readiness, revenue and idle time is the key, with, for most players, un-used readiness and idle time offset, or subsidized by, other income streams. There has also been the rise of the so called “yellow page salvors”: operators with no equipment but a good contacts book who can rapidly assemble a response of sorts; and there are opportunistic salvors, players being in the right place at the right time.
ISU encourages the use of contractors – like its members – who are well-capitalised and who have their own equipment as well as the right “in house” people and a track record of success in the industry. Sentiment, tradition and reputation are important in the shipping world and are considerations as well. And the insurers – both property and liability – are powerful in this regard but it seems they are increasingly driven by price. What must not be forgotten is that the traditional salvor has a willingness and ability to take on the financial risk of the job – “no cure, no pay” – in a way that a “consultant” never can. At the same time, we know that wider shipping industry conditions are difficult for owners and property underwriters – many ISU members are substantial shipowners in their own right – and we want to be seen as helpful partners working cooperatively to reduce losses.
As ever there are many issues in the world of salvage. For now, the most pressing concern is the commercial state of the industry which, as the ISU statistics show, is experiencing difficult conditions. Time, of course, will tell if this is, indeed, a “new reality” or part of the cycle. A strong salvage industry is vital for world shipping and I do not want to end on a downbeat note. ISU members are still part of a vibrant industry providing much needed services: mitigating loss, saving life and protecting the environment. Our members still invest in their equipment and their people and it is my hope that all parties – especially the salvors, owners and insurers – can move forward in the spirit of cooperation that is critical to the job of marine salvage.