Where have all the salvors gone?
- Effects of supply & demand – budget salvage
- Impact on casualty response
- Impact on experience
- More SCRs less salvage masters – robbing Peter to pay Paul?
- Salvage 2025 – crystal ball gazing
John Witte, Exec VP of Donjon Marine and President, International Salvage Union
We have already heard the ISU statistics today showing a substantial fall in salvage and wreck removal revenue from 2015 to 2016. This followed a decrease in revenue the previous year as well. But this is not an industry in crisis. There are still plenty of salvors – meaning entities willing to perform salvage. However the existing marine environment has undoubtedly made life commercially very difficult for many salvage operators. And, as owners and insurers seek to reduce costs, the question is: are all those who are “willing” to perform salvage “able” to perform salvage safely and reliably? Have we lost sight of the fundamentals?
Effects of supply and demand
In an effort to attempt to answer this question, we need to go back to the basics, to classical economics. In my view, this involves the workings of the market with supply and demand setting the price of goods and services. In short, if demand exceed supply, prices will rise and new suppliers may join. Conversely, if supply exceeds demand, prices will fall and suppliers may leave the industry. Of course there are variations to both of these themes and they rely on functioning, transparent markets.
In many industries it is possible for the players to influence both the supply and demand side of the equation. Is the salvage industry one of these industries?
Suppliers can use marketing – and other methods – to stimulate overall demand as well as demand for their own products. Consumers’ demand can increase with more disposable income and they can choose between suppliers on price, quality and “opportunity cost” – the decision to spend their money on other products or services.
The most simple products are commodities. The basic nature of these types of goods are visible and known. The item or service cannot be “differentiated” by suppliers from their competitors. As an example generally speaking a tonne of sand is a tonne of sand no matter where you buy it from.
The further up the chain you go, the more value you can add to the commodity by making it different and therefore charge more for it. A service, which is what our industry supplies, is unlike a commodity. As an example the supply of an hour of a corporate lawyer’s time from firm X is not the same as the supply of an hour’s time from firm Y.
To make the point more topical, the supply of a salvage service from contractor A is not the same as the supply of a salvage service from contractor B. Salvage services provided by different salvors are not commodites and cannot therefore have a commodity price attached to them.
At the same time, there is a lack of transparency in the salvage industry. We do not truly know what price or reward our competitors are performing a specific job for. And, even if we know the contract value, it is unlikely that we will know the detailed cost structure of the winning contractor and so we cannot know the net income they will derive from the job.
Further, collectively, or individually, we cannot stimulate the overall demand for our services. The number of casualties and wrecks that occur in a given year are not within the control of the salvage service providers. This is a function of levels of sea trade, ship safety, crew quality and often luck and circumstances.
Nevertheless there is a clear link between supply and price in our industry. As we have already seen in the statistics today, revenues across the industry are significantly down. There is a general variability to this and a certain degree of cyclicality but there is also unquestionably oversupply in the market.
Oversupply comes from both traditional salvors with additional capacity offered by non-salvors, such as marginal capacity from the presently under-utilised offshore sector.
In short, the salvage industry is faced with the double jeopardy of over-supply and weaker demand – certainly for major jobs. Contractors are prepared to do work in ways that, in the short term, may be less costly for insurers. But that approach, at times, comes at a great price to the owners and insurers – the transfer of risk away from the contractor and onto the owner. And in the longer term the possibility that the services will not be available when needed most due to lack of financial support.
Under these conditions, which have prevailed for the last two years, we might have expected to see some corporate fallout with mergers and acquisitions and others leaving the sector. In fact, the current structure of the industry has proven to be surprisingly durable and resilient. Consolidation has been largely limited to the formation of Ardent from what had been Titan and Svitzer.
This being said, there has also been some re-trenchment with redundancies and closures within the ISU membership. Singapore has seen some of that in the last year from a number of different traditional salvage service providers.
Impact on casualty response
In this environment, how do you judge the quality of salvage providers? There are few barriers to new entrants – with the exception of the OPA 90 dominated US and certain other countries where state entities are favoured but not always required.
Our industry is not transparent and the criteria by which firms are judged is not set or regulated internationally.
It is to be expected that the serious players in the salvage industry will tick all the necessary boxes with their ISO 9001 standards, published QHSE records, good Lost Time Injury records and so on. But sentiment, tradition and reputation are important considerations as well. And the insurers – both property and liability – are powerful in this regard and it seems they are increasingly driven by price. And there is tension between different insurance and related interests to add to the mix. A poor marine economy does nothing to aid relationships.
There is also the rise of the so called “yellow pages salvors”: no kit but a good contacts book; there are opportunistic salvors, ie. being in the right place at the right time – perhaps that has always been the case – and there are ISU members. I would not be doing my job if I did not promote the value of the ISU member.
ISU encourages the use of contractors – like many of our members – who are well-capitalised, who are willing and able to take on substantial financial risk and who have their own equipment as well as the right “in house” people and a track record of success in the industry.
On the demand side, a simple question: what is a casualty versus what is a salvage case? Where is the line drawn between emergency response and a rescue tow. The Salvage Convention’s Article 13 criteria are helpful: minimizing the risk to the environment; the nature and degree of the danger; the time and expense on the part of the salvor; the risk of liability and other risks assumed by the salvor; the availability and use of vessels intended for salvage are among some of the criteria for evaluating and ultimately fixing the reward. Regardless of the contractual terms, these considerations are a useful way to look at any case.
Impact on experience
Less salvage work must mean less experience in all posts from office-based commercial managers to deck hands thru salvage masters. This can also be said about the insurance industry, lawyers and other supporting professions. Indeed, one of the suggested reasons for the decline in the use of Lloyd’s Open Form is that younger underwriters simply do not have experience with LOF and it is an unknown and therefore undesirable option to them.
Concentrating on the practicalities of salvage, the basic drills like establishing a safe connection in less than calm sea conditions and undertaking a rescue tow must not be taken for granted and, in the absence of regular “real” work need to be practiced and rehearsed ready for slick and safe use in a “live” event. Helicopter coordination and casualty evacuation are important components in today’s world of salvage response that requires experience and training to be successful.
More advanced work – bunker removal in a difficult situation, pumping, pressurising, re-ballasting and stabilisation, for example, are harder to simulate for the purpose of training and we need to find ways to keep these skills current when there is less opportunities to ply ones trade.
We also have the issue of non-specialist crews and vessels doing salvage. A powerful AHTS may be suited to the job in some ways but has its crew got the requisite experience to be successful in a casualty environment? Does it carry as a matter of course the necessary towing kit? Is it safe for an inexperienced crew to engage in opportunistic salvage simply because the vessel was idle, available, close by and relatively cheap? On commercial terms without the contactor bearing the financial risk, what if the effort is unsuccessful? Or makes the situation worse? All important questions that require an answer.
At the more strategic level we see a general drift away from seafaring – a joint BIMCO/International Chamber of Shipping study in 2016 reported that there was likely to be a shortage of some 140,000 officers in world shipping by 2025. There is a particular issue with specialties like engineering and LNG. Further, the uncertain hours and potential for long deployments does not make salvage attractive to today’s young seafarers.
More SCRs less salvage masters
Over the last year we have seen the first structural changes to the SCRs’ panel since it was formed with the advent of SCOPIC. SCRs now must re-apply every three years to stay on the panel; must provide evidence of personal insurance and health and fitness for the role. The idea was not to remove certain people from the panel but to ensure the availability of experience within the pool.
Given the low number of LOFs and, by extension, SCOPIC cases, it is clear that one cannot make a make a living from SCR work alone – there are only a handful of jobs a year. Nevertheless, applications continue to come from those wishing to join the panel. Being an SCR has become something of a “badge of honour” with use as a marketing tool. The most active SCRs are often employed by consultancies and have a “day job” to attend to while they await the casualty.
Turning to Salvage Masters what we note is that it is a poorly defined term. There can be few roles in any industry where substantial financial and physical risk rest on the shoulders of such a disparate set of individuals with no recognised qualification. It is hard to imagine a major civil engineering project being supervised by someone with nothing more than long experience to recommend them. Tug masters; naval architects; surveyors all can be considered salvage masters. My point is not to denigrate the role or the term, “Salvage Master.” But it is a fact that opportunities to “learn on the job” are much reduced and so the pool of experience is decreasing. This is not a positive trend.
If we honestly look into our own organisations can we say we have a proper “talent pipeline” of younger men and women who will be the Salvage Masters of the future? This is one of the primary concerns of our industry.
We established earlier that levels of salvage work are reduced but none of us doubts that there will always be some need for salvage capability and talent.
Does the industry need some form of qualification, a structured learning programme? With the various approaches taken by the ISU members to the same casualty, in an effort to provide my quick answer to this question, I believe that there is no such thing as a “cookie cutter” approach to salvage. Therefore to try to introduce standards and structure that works for all salvors is, in my view impossible and counterproductive to the goal.
Crystal ball – salvage 2025?
Although we have seen ISU statistics from 2016 showing a dramatic fall in revenues we are still a vibrant industry and I expect that to continue. We cannot eradicate risk in shipping. Maybe the salvage world has gone from a focus of specialization to diversification? Great strides have been made in vessel safety and the operation of ships. Improved crew training, electronic aids to navigation increased liability to owners/charters and so on have all helped to reduce the number of accidents and casualties. But research by the US Coastguard demonstrates that the root cause of more than 75% of marine casualties is the human factor. There is talk of remotely operated ships but I do not believe in my lifetime we will see ships with no personnel and therefore the potential for casualty remains. And somebody has to be prepared to offer services in those casualty situations which will save life; protect the environment and save property.
Shipping is cyclical and it is possible that, along with improvements in the global economy, 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 will not now grow exponentially but the number of very large ships will dominate world trade and the value of property on boxships will rise.
It is possible maybe even probable that we will see one or more major casualties between now and 2025. And it is not impossible that one of those will be something we have not seen for a long while – such as a major tanker disaster in a sensitive location. The ISU’s pollution prevention survey for 2016 shows that our members intervened in cases involving more that 700,000 tonnes of crude oil and more than 500,000 tonnes of refined products. These were several different cargos and we do not say that there was an imminent risk of this material going into the sea. But it gives you an idea of the threat.
One point is certain, and that is that 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 as today, if not more so.
Looking ahead, I do not expect to see dramatic change to the structure of the marine salvage and wreck removal industry. There may be some more consolidation and there may be some more retrenchment. But I expect there will still be the mix we see today of regional operators with other income streams; a very small number of “traditional” emergency response salvors and salvage units continuing as part of large industrial groups.
I believe that LOF will keep its place as an important contract but that its use will not rise significantly. SCOPIC will continue to be an important clause but there will have to be renewed commitment by all parties to see it used properly and fairly. I expect to see contracting not so different from today in the foreseeable future.
2025 is not so far away and evolution, not revolution, will happen in the meantime.