Future looking bright despite Russian ban, however biological challenges pushing up costs.

After successfully navigating some potentially treacherous market conditions following the Russian ban in August last year, the Norwegian farmed salmon industry will now look to capitalize on what are still relatively high prices supported by a global salmon production growth slowdown in 2015. Norway is once again leading the way in terms of production growth, with Chilean producers expected to register negative growth over the next 2 years at least, as they seek to ensure the improving biological situation continues. 

This will be the first drop in Chilean production since the ISA outbreak in 2010, which signals a new phase in the industry’s development. Consolidation is continuing with a number of major mergers and acquisition possibilities being considered, while profit margins are beginning to converge with those of Norwegian farmers. This latter trend is largely the result of relatively better management of sea lice on Chilean farms, improved overall productivity growth and better access to markets such as the Russian Federation and China in addition to their main markets of the USA and Brazil.

Meanwhile, in the wild salmon market, there is expected to be an overall increase in catches of wild Pacific salmon species in Eastern Russia and Alaska. The pink salmon harvest, in particular, is returning to normal levels after a weak 2013. Meanwhile, sockeye harvests are also expected to be well above the norm, with the Bristol Bay total figure forecast to be the third highest since 1960.

Prices

Prices for Norwegian fresh whole Atlantics in the first quarter 2015 have languished somewhat below last year’s levels for the same period, after peaking around Christmas. Although the krone is currently substantially weaker than the euro compared with the exchange rate last year, there are a number of other contributing factors to this development. One is that relatively higher seawater temperatures in 2015 are boosting growth rates and pushing against biomass ceilings, which in turn means more fish must be harvested. This necessity is growing more pronounced as the end of a temporary increase in biomass limits was set to end on 1 April. There is also the continued absence of the Russian market which traditionally absorbs a lot of early year volumes. More recently, China also introduced a ban on salmon imports from three Norwegian counties, citing disease concerns.

Short-term future price expectations are also suffering, with Fish Pool forward contracts over the next three months being driven steadily down. Despite these low expectations, the estimated minimum price at the end of August is still around the NOK 37 per kg mark. For Chilean salmon the current trend is similar, with fresh fillet prices in the USA somewhat below last year’s level as the US market is facing more plentiful supply and Brazilian economic conditions are currently depressing demand. For frozen Coho on the Japanese market, yen import prices are approximately the same as last year, although volumes are higher.

Norway

Biomass in Norwegian farms in the first two months of 2015 were above those in 2014, as were export volumes. However, with prices down compared with last year, overall export value in NOK terms were approximately flat. Though the krone has recovered slightly versus the euro in the last few months, it is still weaker than last year, a positive for Norwegian exporters that has prevented a further drop in NOK prices. Exchange rate development versus the US dollar has been even more favourable, allowing Norway to direct more volumes to the already well-supplied US market with only a slight drop in prices.

In terms of annual figures for 2014, export performance was impressive, particularly given the Russian embargo that has been in force since August. Total Norwegian salmon export volume for 2014 was 4% higher than in 2013, according to the Norwegian Seafood Council (NSC), with a slight increase in the average export price for fresh whole salmon at NOK 41 per kg. However, as a result of their exclusion from the Russian market, 11% more salmon was exported to the EU, for a total of 720 000 tonnes. As was expected, this had a negative impact on prices, although the exchange rate trend and ample demand, in particular for fresh and frozen fillets, ensured the impact was minimal. Poland and France remain the top two export destinations for Norwegian salmon.

Looking at other markets, there was an inevitable drop in Norwegian exports to Eastern Europe in 2014, by some 37% in value terms. In addition to the Russian ban, the Ukrainian market is also affected by continuing political and economic instability in the region. The lack of opportunities in this region, however, were compensated for by booming demand in the USA and Asia. According to the NSC, Norway exported 9 000 more tonnes of Atlantic salmon to the USA in 2014, at high prices. These exports consisted of approximately 37% frozen fillets and 30% fresh fillets. In Asia, a similar trend was observed, with notable increases in volumes to Israel, Hong Kong SAR and Republic of Korea.

The specific challenges facing the Norwegian salmon industry were discussed by key figures in the industry at the North Atlantic Seafood Council in Bergen at the beginning of March. Generally, it was acknowledged that the basic drivers for strong future growth are in place, but certain obstacles must be overcome if the full potential of the industry is to be realized. Well-known issues having to do with shifting regulatory frameworks were raised, as were the physical limits to expansion. Another major concern is sea lice. Although numbers are slightly down at the beginning of 2015, in the longer term sea lice continue to cause problems for farms in Norway, and treatment pushes up costs. Alternative (non-medicinal) treatments were discussed, such as cleaner wrasse stocking, pen design and offshore locations, but further R&D investment is needed.

The first and second half of 2014 were sharply contrasting in the Norwegian trout industry. Good performance up until the Russian ban in August pushed up overall figures for the year and the NSC reports approximately flat total export value for the year compared with 2013, with a 4% increase in the average price for fresh whole trout. Following the removal of the Russian market, however, volumes dropped significantly and prices also fell. Despite increased volumes to alternative markets like Belarus and Japan, this trend has continued into 2015. 

Chile

In 2014, the Chilean salmon and trout industry exceeded USD 4 billion in export value for the first time in history (USD 4 363.3 million according to InfoTrade). This figure represents an increase of 24.2% compared to USD 3 513.2 million registered in 2013. In terms of volume, 566 500 tonnes were shipped in 2014, which represents an increase of 7.3% compared with 528 100 tonnes exported in 2013.

Over 800 000 tonnes of salmon and trout were harvested, and according to the National Fisheries and Aquaculture, this figure represents 96% of the joint Chilean production of Atlantic salmon, rainbow trout and coho salmon.

In terms of Atlantic salmon, there was an increase in harvest weights and performance, and a decrease in mortality. Meanwhile, coho salmon saw a slight increase in harvest weights and performance while for rainbow trout, although there was a decrease in mortality, this occurred in conjunction with a decrease in harvest weights and performance. Thus, the challenge for the coming years is to improve production indicators of rainbow trout.

Meanwhile, the Director of the National Fisheries Service (Sernapesca), José Miguel Burgos, categorically said to Aqua.cl that "2014 was one of the best in the last five years for sanitary conditions". During 2014, Atlantic salmon were in healthy condition while for trout, improvements were lower. Burgos said that there is a consolidated model to control the ISA virus, although some cases were recorded during 2014. Mortality did not exceed 1.5 million salmon where total salmon in water exceeded 150 million.

In economic terms, the President of the Association of Chilean Salmon Industry AG (SalmonChile), Felipe Sandoval, explained to the same Chilean website that while the rise in dollars benefits exports, it also increases the value of their operational costs because the industry is “dollarized”. Sandoval added that "although the price factor of the US currency is important to the industry’s utilities, the fact that most influences is the final value of salmon".

Currently, the salmon industry is progressing in implementing long-term health strategies for production. Companies are actively participating in the development of research and technology to strengthen their decisions, as well as the transfer of such knowledge. To Alfredo Tello, Analyst of the Technological Institute of Salmon of SalmonChile, the speed and effectiveness with which they incorporate these new strategies into their production model will largely determine how quickly and effectively the industry will become sustainable.

UK

Scottish farmed salmon is in high demand in big markets, and 2014 was another growth year following on significant expansion of their export industry in 2013. Good demand from the USA has driven this growth over recent years, although demand in France for quality certified Scottish salmon (Label Rouge) has also been bouncing back. China is another destination that is steadily growing in importance, and Scottish industry representatives have emphasised the key role of Asian markets in future development. In January 2015, however, UK exports were substantially down, primarily because the USA had increased fresh whole Atlantic imports from Canada and Norway.     

Domestic demand for salmon is also good in the UK, particularly for fresh salmon. According to consumer research firm Nielsen, total retail sales for 2014 came to 54 300 tonnes worth GBP 862 million, up 2.8% and 5.4% from the previous year respectively. Large mid-range food retail chains account for the vast majority of sales.

Markets focus

In the weeks following the Russian ban, Chilean salmon exporters seized the opportunity presented by the exclusion of Norway, their main competitor, from this important market. Indeed, frozen Atlantic salmon exports to Russia from Chile almost tripled in the second half of 2014 compared with the same period in 2013. The average Russian consumer, however, has not retained his purchasing power. Seafood consumption has dropped substantially, with retail sales down almost 50%. Inflation has risen as well, with the weak ruble increasing import prices. Expensive seafood items like salmon have suffered in particular, and Russia’s new suppliers have been finding it increasingly difficult to find buyers.

Brazil is another market where economic problems and a rapidly weakening currency has hurt demand. Fortunately for the world’s salmon suppliers, the USA has been a consistent source of strong demand, although with domestic and Canadian production growing it has an ever increasing range of supply options.

Russian Federation

The substitution of fresh salmon from Norway by frozen salmon from non-sanctioned countries has led to lower volumes of high-quality salmon on the Russian market for both fish processing companies producing steaks and fillets from fresh salmon, and final consumers, who are often offered previously frozen salmon as fresh in retail stores.      

After the embargo, fresh salmon was moved to the category of elite products, and its price in the retail segment jumped from 600 RUB per kg in August 2014 to RUB 1 200 RUB per kg in the beginning of 2015. This sharp price increase could not be negated, even with additional volumes of processed Norwegian salmon exported from Belarus to the Russian market.     

While in 2012 and 2013 Russia was the largest importer of Norwegian salmon, the total Russian import of salmon collapsed by 34% to 73 400 tonnes in 2014. The Faroe Islands and Chile are now the main supplying countries of Atlantic salmon to Russia, but in total, those countries cannot make up even a half of previously imported volumes.

The lack of salmon on the Russian market can be partially filled by domestic salmon species. According to the Federal Agency for Fisheries, Norwegian salmon is getting substituted with Pacific salmon species from the Russian Far East (total catch of 337 000 tonnes in 2014). In addition, the output of farmed Atlantic salmon in the North-Western Federal District of Russia is around 20 000 tonnes.   

France

Demand for salmon in France suffered somewhat from high prices and negative publicity in 2014, although total import value was approximately flat. There was a notable shift in composition of suppliers, as Norwegian fresh farmed Atlantic salmon - the target of an anti-salmon farming media campaign - was replaced to some extent by French certified farmed Scottish salmon. There has also been an increase in demand for frozen fillets, particularly from the Faroe Islands, and for domestic French smoked product.

Germany

Seafood consumption in Germany is following an overall downward trend, but salmon has so far been an exception. Germany imported more salmon at higher prices in 2014, boosting purchases of Norwegian fresh whole Atlantics in particular. This latter shift is being driven by large discount retail chains, with NSC reporting an 80% increase in fresh salmon consumption in Germany between 2012 and 2014. The German market has also established frozen and smoked segments, with imports of cheap frozen fillets from China growing significantly in 2014.

Japan

Long the major market for the bulk of Chilean farmed coho production, Japan saw a large drop in import volumes of frozen whole coho in 2014. Imports of frozen fillets, however, increased significantly, likely reflecting the fact that declining demand for seafood in Japan has forced domestic processing plants to close. Additionally, the even year drop in sockeye harvest volumes, which traditionally competes with farmed coho, contributed to the increase of frozen fillet imports. The substantial weakening of the yen, which has made salmon and other seafood imports more expensive explains the decrease in total import volumes. For 2015, the forecasted flat coho production, the stabilising yen and increased sockeye harvests should slow or reverse price increases.  

Outlook

Despite the recent downward revision of forward prices, there is still a relatively positive outlook for the rest of 2015. This is the inevitable result of continued strong growth in demand and slowing supply growth. The deterioration of the economic situation in Russia and Brazil is presenting a temporary challenge to suppliers, but the USA, the EU and Asia are evidently capable of absorbing excess volumes. In the longer term, it is rising costs relating to biological management and feed that are more of a concern for the industry. This is also causing discussions regarding the viability of land-based salmon farming to become less one-sided, as evidenced by debate at the North Atlantic Seafood Forum in early March.