GLOBEFISH - Information and Analysis on World Fish Trade

Healthy profit margins for aquaculture companies drive search for new salmon supply

24/06/2019

With the Chilean sector’s performance improving in 2018, the global Atlantic salmon aquaculture industry is matching good profitability with consistent and controlled growth. Despite a 5 percent increase in supply in 2018, production growth continues to lag demand and stakeholders are waiting to see whether one of a range of competing supply solutions can fill the gap. 

Production

Atlantic salmon

Global production of farmed Atlantic salmon is estimated to have increased by around 5 percent in 2018, to a total of almost 2.5 million tonnes. The bulk of the increase was accounted for by 14 percent growth in Chile, where a new regulatory regime is producing results. In Norway, the world’s largest producing country, a cold winter and fish health issues translated into a moderate 5 percent increase in harvests. More severe environmental and biological challenges in Scotland saw production drop by over 20 percent. The remaining 13 percent of supply is provided by a number of smaller players, many of which are now stepping up their efforts to develop their salmon aquaculture industries in order to secure a larger share of an increasingly lucrative market.

Norwegian production was slightly below projections for 2018, due primarily to the effects of a cold winter and high levels of sea lice, particularly in the south of the country. The cost of combatting sea lice, which have become resistant to many previously effective treatments, is estimated to now represent around a fifth of total production costs incurred by Norway’s salmon farmers. However, in spite of this constant drain on the bottom line, current price levels are more than sufficient to ensure good profitability and confidence in the sector is high. While regulatory restrictions impose relatively stricter limits on production growth than many other regions, demand for licenses in Norway is strong and investment continues to pour into the sector.

Reports in 2018 suggest that new regulations in Chile, which aim to make output growth conditional on positive environmental and biological metrics, are having a positive effect on the industry. Multiple key performance indicators, including feed conversion ratios, mortality rates and average harvest weights all improved last year and production volumes rose significantly as a result. Although some companies are unhappy with the new regulatory regime as they feel it has benefitted stakeholders unequally, stock price trends show that valuations of Chilean companies have risen significantly.

As demand for salmon continues to strengthen globally, a combination of geographic and regulatory constraints on traditional open net-pen farming has limited the ability of producers to keep pace. Atlantic salmon requires specific environmental conditions to flourish, with water temperature being a key consideration. Although open netpens located in bays and inlets are by far the most cost-efficient means of producing the species at present, the current price level is an increasingly powerful incentive to find new supply solutions. These potential solutions include the development of Atlantic salmon aquaculture in new regions from Iceland to China, new technological approaches such as land-based and offshore farming, genetically engineered salmon and even imitation salmon derived from algae.

Other farmed salmonids

Chilean production of coho salmon is estimated to have reached some 185 000 tonnes in 2018, an increase of 34 percent. This follows on the back of a significant increase in 2017 and underlines the potential that the Chilean industry sees in low-cost coho salmon, despite Japan being the only large market at present. Chilean harvests of farmed trout reached 79 000 tonnes in 2018, an increase of 4 percent from 2017. In Norway, farmed trout harvests increased by 15 percent last year, to an estimated 77 000 tonnes, after 2 years of tight supply.

Wild salmon

Wild salmon harvests in Alaska and the Russian Far East combined totalled around 921 000 tonnes. The Russian Kamchatka Peninsula fishery accounted for 70 percent of this total, with a record pink salmon harvest exceeding half a million tonnes. In Alaska, catches were below forecasts at around 275 000 tonnes. Sockeye salmon made up the largest proportion of this total with a 43 percent share.


Markets

Global demand for salmon shows no signs of weakening, and consumer resistance to high prices has largely been temporary. Salmon’s popularity continues to grow across virtually all regions of the world, and suppliers have a wide choice of export markets. The United States of America, the EU28 and Japan remain the most important markets in terms of sales, and underlying demand in all three has been solid. China, Brazil and the Russian Federation are three countries whose large populations translate into enormous potential. While the latter two have struggled with economic difficulties and have only recently begun to recover, demand for salmon in China has been following a strong upward trajectory. Chile stands out as the major beneficiary of demand growth in these key emerging markets, maintaining a complete monopoly of the Brazilian market and securing the role of top supplier to the Russian Federation following the ban on imports from Western nations. In China, supplier competition is intensifying after Norway made significant market share gains in 2018 following concerted efforts to establish themselves in this crucial market. Norway’s access to the Chinese market had previously been limited due to political tensions between the two countries but these restrictions are now easing. However, Norwegian salmon is still subject to a 10 percent tariff while their Chilean counterparts pay no duty thanks to a customs agreement.

Chilean marketers have also been working on improving their brand image in the major US market, where they have been at a significant price disadvantage relative to their competitors. High antibiotic use at Chilean farms has inflicted some damage on the reputation of Chilean salmon with US consumers and retailers, and this has motivated efforts to reduce dependence on antibiotics through regulatory reform. The industry is looking to place greater emphasis on the Patagonian origin of Chilean fish in order to associate their product with a world-famous region known for its natural beauty. Some salmonid producers have also begun to open stores in different parts of Chile, to tap into domestic demand for local product.

Genetically engineered Atlantic salmon can now be raised and sold in the United States of America after the US Food and Drug Administration (FDA) lifted import restrictions. AquaBounty, the company to whom these restrictions applied, can now import eggs from their hatchery in Canada that contain a genetic modification promoting more rapid growth than is otherwise possible. The FDA determined that the fish is safe to eat and that there is no negative impact on the welfare of the fish as early as 2015, but it is only the latest ruling that allows for the raising of the genetically engineered fish within US borders. 

Trade

Rising prices and strong demand growth, particularly in the core EU28 market, has seen Norwegian salmon export revenues follow a consistent upward trend over the last few years and this continued into 2018. According to figures released by the Norwegian Seafood Council (NSC), Norway exported 1.1 million tonnes of salmon worth NOK 67.8 billion (USD 8.34 billion) last year, an increase of some NOK 3.2 billion (USD 393 million). Although Norway is making absolute gains in Asia and the United States of America, in relative terms it is becoming more dependent on the EU28 market, helped by favourable currency trends. Exports to the EU28 accounted for 73 percent of Norway’s total export value in 2018, up 2 percent from the year before. 

The NSC reported a 16 percent increase in the volume of Norwegian trout exports in 2018, to 46 400 tonnes. Total value dropped by 5 percent, to NOK 3 billion (USD 367 million). Belarus, the United States of America and Japan are the top three export markets for Norwegian trout, filling the gap left by the imposition of the Russian Federation import ban in 2014. Exports of Chilean salmonids (Atlantic salmon, coho salmon and rainbow trout) grew by 20.8 percent during 2018 compared with 2017, to 631 700 tonnes, while revenue increased by 11.1 percent to USD 5.17 billion. 

The United States of America remains the most important market for Chilean salmon with 169 700 tonnes (+21.2 percent) worth USD 1.8 billion (+12.3 percent). This represents around 35 percent of the total volume of US imports of salmon in 2018, which were worth a record USD 4.1 billion.

Japan is Chile’s second largest export market, importing 143 000 tonnes (+ 18.5 percent) worth USD 1.07 billion (+5.3 percent) in 2018. Japanese imports from Chile are primarily of coho salmon, but Japanese imports of Atlantic salmon from Norway and wild Pacific salmon from the Russian Federation and the United States of America also rose in 2018.China stood out amongst the larger salmon markets in 2018, importing 300 000 tonnes of salmon worth USD 1.35 billion, an increase in value of 43 percent compared with 2017. The larger proportion of this was comprised of wild salmon imports from the Russian Federation following its record harvest, while imports of farmed Atlantic salmon from Chile and Norway also increased.

Exports of farmed Atlantic salmon from the United Kingdom fell significantly in 2018, primarily due to a drop in production in Scotland. France remains the top export market for the United Kingdom, and around half of UK salmon exports are destined for the EU28. The ongoing uncertainty regarding the terms of the imminent departure of the United Kingdom from the EU28 is of major concern to the country’s salmon industry, which would be subject to the EU28 default tariffs of 2 percent for fresh salmon and 13 percent for smoked salmon in the event of a no-deal Brexit. 

Prices

With continued demand growth and tight global supply, the price of Atlantic salmon remained high in 2018. According to the Fish Pool Index, the export price of fresh whole Atlantic salmon from Norway showed no change in krone terms in 2018, averaging out at NOK 60.70 (USD 7.46) per kg. Regular intrayear swings from the NOK 40s to almost NOK 80 per kg have been taking place on a seasonal basis since 2016, but the NOK 60 per kg level is generally reflective of the new price plateau for Norwegian salmon. In Chile, average prices for fresh fillets to the United States of America fell slightly by 5.4 percent in 2018, from USD 10.96 per kg to USD 10.37 per kg. Meanwhile, lower than expected harvests saw ex-vessel prices for wild salmon in Alaska rise significantly for all species.

Outlook

Global production of farmed Atlantic salmon is forecast to increase by around 4–5 percent in 2019, keeping pace with aggregate demand growth and maintaining a tight market balance that is expected to support prices at current levels. Growth in Chile is expected to slow and Norway is likely to recover some market share in multiple markets with a 4–5 percent increase in harvests, although warmer sea temperatures that last year may add to sea lice problems. UK production is set to bounce back strongly, but the major focus of the industry will be the outcome of Brexit negotiations. The terms under which the United Kingdom eventually exits the EU28 will potentially have tariff implications for salmon exporters, as well as misunderstandings and associated delays caused by new and unfamiliar customs procedures. Elsewhere, modest but positive economic growth prospects in all major markets, including continued recovery in the Russian Federation and Brazil, will support further strengthening of aggregate global demand. The near-universal profitability of producers worldwide will continue to incentivize efforts to find alternative means of supply.

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