Opening Address by John Witte, President, International Salvage Union
Good morning and it is an honour to address you again as the President of the International Salvage Union. I can see many familiar faces and, to an extent the issues that I will address will also be familiar because, putting to one side the disruption and difficulties of the pandemic period, the fundamentals of our sector have not changed much in the past years since I last spoke at this conference as ISU President.
Today I will set out how the ISU sees the state of the industry and it is mixed picture. On the one hand we remain an active an essential service provider to the shipping industry with many notable successes. On the other hand our members have less work than ever and many feel under great economic pressure.
This has always been a variable industry and corporate planning and financial management is difficult when years can pass between significant injections of income. Continuing to provide services in the hope of work but when the capital could be more efficiently employed elsewhere is a challenge, particularly for organisations whose ownership structure requires regular reporting internally and externally.
Salvors are nothing if not entrepreneurs but sometimes classical economics seem to be against us with an imbalance of supply and demand for our services.
The ISU collects statistics annually from its members and they form the only published record of the state of the industry. They are not comprehensive because some services are provided by organisations that are not ISU members and there can be some variability in the responses we receive.
The statistics are for income in the year it was received not the year in which the services were provided and that introduces a time lag. Nevertheless they are a useful marker for the financial state of the industry.
The most recent figures are for the calendar year 2022 and were published in July this year.
Total revenue for ISU members from all sources was US$ 241 million which was down by 38 per cent on the 2021 number of US$ 391 million. There were 149 services provided compared with 189 the previous year.
These are gross income figures from which all of the salvors’ costs must be paid.
Of the total, Emergency Response services generated US$ 166 million and wreck removal income provided US$ 55 million.
Any industry experiencing a near 40 per cent drop in income must have concerns about the future and, with the volatility I have already mentioned, we may still hope for a recovery. But the general picture of a smaller number of larger and more complex cases enhances that annual variability and the reality is that the gross income trend is downwards over the past decade with numbers more comparable last year to those of twenty years ago. Allowing for inflation, that is a very serious decline in real terms.
By comparison, let me turn to the financial situation of the marine insurance industry as presented in the International Union of Marine Insurance annual statistics. Premium income for the latest statistics for 2022 for cargo and ocean hull lines of business, the most relevant to the salvage sector, were US $29 billion.
IUMI noted that 2021, and particularly 2022, have shown, and I quote:
“A relatively strong growth in the global premium base across all lines of business. In combination with a benign claims impact, this has translated into a much better performance in terms of loss ratios, specifically for hull and cargo.” And claims frequency had a “long-term downward trend.”
I therefore feel bound to point out the great asymmetry between our two branches of the shipping industry. The ISU members’ 2022 gross emergency response income of US $166 million represents 0.6 per cent of the IUMI 2022 hull and cargo premium income of US $29 billion.
And we must find ways to help the insurers to recognise that the cost of salvage should not be the focus but the values preserved.
IUMI also reported its concerns about many forms of risk including cargoes such as lithium-ion batteries; new propulsion technologies; climate change and new weather events; cyber and the accumulation of risk as cargo of increasing value is being carried on vessels that continue to grow in capacity. The refloating of the grounded containership, EVER FORWORD, in the USA clearly demonstrated, as with the EVER GIVEN in the Suez Canal, the added value of professional salvors in loss mitigation – minimising delays to the vessel’s valuable cargo and preventing lengthy disruption to US ports.
Across all of these kinds of threat to safety and property there continues to be a vital role for salvors to work together with insurers in the service of their mutual clients, the shipowners.
No ISU president can address this conference without reference to the Lloyd’s Open Form salvage contract. Since 2021 when Lloyd’s announced that it was considering the closure of its Salvage Arbitration Branch many people have spent many hours working on how to reinvigorate the contract. Lloyd’s has responded with initiatives to streamline the arbitration process, increase transparency and promote the Environmental, Social and Governance benefits of the contract as well as promoting the contract in Asia.
But, despite the near universal theoretical support from all parties for the continuation of the contract, its actual use continues to decline. The 2022 ISU statistics show a historic low level of LOF cases – 26 for ISU members – generating income of US$ 66 million. The 2023 numbers are likely to be lower still.
This needs to be seen in the context of the International Group of P&I Clubs’ (IG) report into delays in emergency response contracting which ties closely to the importance of LOF.
The comprehensive report was prepared by Hugh Shaw the well-regarded former UK Secretary of State’s Representative for Salvage and Maritime Intervention (SoSRep). The report found that delays were occurring.
Few casualties improve with age and delay can lead to worsening of the situation with the potential for increased risk of loss of property – sometimes even total loss – and damage to the environment. The report notes that: “Any delays in decision making may not only have a detrimental effect on the safety of life of those onboard but may ultimately determine the fate of the vessel, and its cargo, with the potential for consequential damage to the environment. The consequences of delays in requesting, or agreeing salvage services can be disastrous, especially if there is damage, or the potential of damage, to the marine environment.”
Delay was found to be due to a number of factors but erosion of the authority of masters and deference to shore-based decision making was identified and Mr Shaw also reported that financial considerations significantly influence the choice of contract, or salvage services provided.
The IG’s report made a number of recommendations including considerations about LOF, improved transparency, information and training, improved communication between owners, managers, masters and authorities during incidents and the possibility of a cross industry group to consider a code of practice on emergency response.
And yet some property insurers still seem concerned about LOF. Some ISU members have report that insurers sometimes interfere with the choice of contracts – persuading shipowners and managers and their masters not to agree LOF. We hear reports of claims handlers trying to, as it were, direct operations. This is very dangerous and carries the grave risk of the situation becoming worse and attempts to reduce costs can easily lead to a worse outcome.
ISU respects that IUMI has taken the initiative with an early draft of a proposed Code of Practice on salvage contracting but ISU has concerns about categorising incidents and applying pre-determined contracts to each type. All situations have the possibility to evolve in unforeseen ways. And this approach seems to marginalise use of LOF.
ISU is a strong supporter of LOF and perhaps the default option in any incident should be LOF with a recognition that if conditions or inspection allows, the contractor should be willing to change to another contract. That will require trust and transparency, but that is what Lloyd’s seeks.
There have been some informal discussions with IUMI and we are looking forward to the collaborative, “cross industry” effort the IG report’s recommendations called for including the clubs and owners whose interests extend to environmental protection. This is possibly the most important consideration in the modern world and we need to ensure that the capability, and willingness, of commercial salvors to provide vital services around the world is valued and not eroded.
In 2022 ISU members provided services to vessels carrying 2.6 million tonnes of potentially polluting cargo and fuel which is a clear demonstration of the critical role of professional salvors in protecting the marine environment. It included 11 cases which had more than 2000 tonnes of bunkers on board and some 750,000 tonnes of containerised cargo. That compares with 140,000 tonnes of crude oil, confirming the shift over the past decades as oil trades have become safer. Boxes stuffed with harmful and dangerous goods, including plastic nurdles, represent one of the biggest threats to the marine environment. They are potentially very damaging and, with the added issue of misdeclaration of contents, dangerous to deal with. As we say, “containers are the new oil”.
Bulk cargoes increased significantly to 1,236,000 tonnes in 2022 compared to 425,000 the previous year and this category includes products such as coal, scrap steel, grains, soya and cement.
ISU is transparent about the fact that not all these potential pollutants were at immediate risk of going into the sea. Some cases will have had limited danger, but others will have carried a real risk of causing substantial environmental damage. In an era of “zero tolerance” of any pollution, even the smaller cases represent a significant concern and major threat to reputation.
Behind both the financial and pollution numbers much other work has been undertaken to ensure that the industry and its stakeholders are aligned on key issues. There has continued to be progress in the SCOPIC regime with the ISU, IG and others from the Lloyd’s SCOPIC Committee agreeing new SCOPIC rates as part of an annual review that has replaced the triennial review while inflation rates remain volatile. New Guidelines on the role of the Special Casualty Representatives have been published and which provide more clarity on a role which has evolved since the introduction of SCOPIC in 1999.
Work continued on revisions to the BIMCO Wreckstage contract and which is now completed [TBC] and will be discussed later this morning in more detail. Fairness and the treatment of risk are at the heart of the contract. Another consideration in wreck removal is the contractors’ ESG credentials which is increasingly important when the Clubs are assessing their options. Certainty and quality must prevail and price should not be the only consideration.
Operational matters have been dominated by concern about the prevalence of fires on containerships and the increasing concern about battery fires in car carriers and on RoRos. ISU members are often the only agency with the capability to deal with such incidents and have a proud track record in this specialised field including recent high profile cases in my home port of Newark and off the Dutch coast.
ISU members recognise that they need to position themselves as “loss mitigation partners”. Co-operation between the shipowner, their underwriters and salvors and shore-based authorities is vital for a successful salvage operation. Joint working, rather than conflict will go a long way towards mitigating the potential for environmental damage and pollution; damage to the vessel or its cargo and, most importantly, may prevent loss of life or injury to the crew.
As I come to the end let me be provocative. The ISU and IUMI statistics reveal the huge gulf between the income of the insurers and the salvors. We must cooperate but we must stick to what we do best in the service of our mutual clients. Property insurers should not seek to manage incidents and must focus not on what salvage costs but what it saves and they should consider creative ways to share cost, for example, by setting up a salvage mutual fund.
The Salvage Convention and Article 13 awards must remain as the cornerstone of our industry if we are to retain the concept of the professional salvor available to deal with all kinds of incident around the world, to save life, protect the environment and prevent loss.