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GLOBEFISH - Analysis and information on world fish trade

New Chilean regulations limit salmon supply growth

07/11/2016

As global demand shows little sign of abating, prices for farmed salmon have been pushed steeply upwards over the last six months as the market adjusts to multiple supply limiting developments. These include algal bloom mortalities and new regulations in Chile, problems with sea lice in Norway and lower global wild harvests. Profitability is strong for Norwegian farmers, but wild producers, Chilean farmers, processors and wholesales are not benefitting to the same extent.

Production

Norway
As Norwegian farmers continue to face difficulties with sea lice, farmed Atlantic salmon production in the country is expected to decrease by 2% this year to approximately 1.2 million tonnes. In May, total standing biomass at farms was down 4% compared with May 2015, with a relatively higher proportion of younger generation fish and a lower average weight. The shortage, particularly for larger sizes, has seen prices spike repeatedly to higher and higher levels. As of week 24, the weighted NASDAQ salmon index hit NOK 74.8 per kg (EUR 8 per kg), some 45% higher than the same week in 2015.
Salmon export volume out of Norway in the first three months of 2016 was 6% lower than the same period in 2015, to total 227 000 tonnes. In value terms, exports were up 20.7% over the same period, due to the elevated price level. The average price for fresh whole Atlantics over the first quarter of 2016 was NOK 58.9, 28.5% higher than in 2015, yet demand in Norway's major markets was not overly affected. In particular, the large EU market, constituting 74% of Norwegian export value, imported NOK 9.9 billions worth of salmon from January to March, 23% more than in 2015.
The most important growth markets for Norway in the first quarter of 2016 were Italy, the USA and Viet Nam. Total volume of Norwegian salmon exports to these markets increased by 5.8%, 10.9% and 83.8% respectively. Buyers in Italy and Viet Nam are primarily interested in fresh whole Atlantics for reprocessing, while in the USA, Norwegian exporters are rapidly expanding their share of the fresh fillet segment, helped by the strong US dollar. Aside from the USA, Asian markets are also being targeted by the Norwegian industry as a growing, urbanized middle-class there represents an enormous source of future demand for salmon. Thailand in particular has been identified as having great potential given the strong increasing trend in salmon consumption.

The Norwegian's industry top challenge remains sea lice, and one possible solution currently being pursued is the development of offshore sites. Salmon kept in offshore pens are generally less susceptible to sea lice infestation and the large aquaculture companies are scrambling to apply for a total of 27 development licenses on offer while also investing in offshore farming technology. For the foreseeable future, however, costs of sea lice treatments will be more than offset by the extreme price levels which are resulting in healthy margins, record profits and soaring stock prices for Norwegian farming companies. And with a widening gap between supply and demand, reflected by regular upward revisions of forward prices over the last six months, the outlook for the industry's producers is ever more positive.

Trout
The Norwegian farmed trout sector is now recovering strongly after the negative impact of the Russian trade embargo, with a 113.6% increase in total exported value in the first three months of 2016, for a total of NOK 856 million. Average prices for fresh whole trout were up 8.6% over the same period, to NOK 47 per kg. The recovery has been driven by strong demand from Asian markets such as Japan, Eastern European markets like Poland and Belarus, and increasing interest from US buyers. With the supply surplus from the temporary hike in biomass limits following the Russian import ban now used up, harvest volumes are now relatively lower than last year, and the price outlook remains positive.

Chile
In Chile, 2016 started shaky due to the algal bloom in southern Chile, resulting in large salmon mortalities and decreased harvests during the first quarter of the year, continuing into April. Chilean fishery officials considered the situation extremely serious as an estimated 10% of dead salmon had to be tossed into the sea.

In an attempt to address the volatility of supply in recent years, Chilean authorities have introduced new regulations limiting production growth to 3% per year. The new legislation also penalizes aquaculture companies for poor sanitary performance, targeting an issue that has troubled the Chilean industry for some time. The market response to this development has generally been positive, and shares for many companies have spiked on the news.

According to a report by AquaBench, for the first four months of 2016, Atlantic salmon experienced a 38.5% cumulative mortality, coho salmon 8.5% and rainbow trout 15.8%. In figure terms, this meant a total of 38.2 million dead fish (31 million Atlantic salmon, 4.2 coho salmon and 2.9 million rainbow trout). Moreover, smolt harvests during the January-April 2016 period decreased by an average of 20.7%, compared with the same period last year.

This crisis also impacted livelihoods, with, the salmon industry having to layoff employees. The Undersecretary of Fisheries and Aquaculture (Subpesca), rejects the idea that the algal bloom is a good excuse for layoffs, however these dismissals are continuing and as a result, workers and legislators are urging for solutions.

In terms of prices, analysts predict that the price of Atlantic salmon, which as of June was USD 8.9 per kg, will experience a significant increase in the second half of the year.

UK
The major event defining current market trends in the UK is clearly the referendum vote to exit the EU. Although the UK economy took a hit in the immediate aftermath of the surprise result, the full impact of the decision is yet to become clear. As the UK government now has two years to negotiate the terms of the country's departure, there are many possible scenarios that will have varying implications for the salmon farming industry and its competitiveness on the export market.
In the meantime, the sharp weakening of the GBP has made Scottish salmon relatively cheaper for foreign buyers, which is likely to stimulate demand at least in the short term. In fact, the currency has been depreciating since the start of the year, and this saw export volumes increase by 31.7%, to 28 700 tonnes in the first quarter of 2016.

Of course, exchange rate developments that favour exporters have the opposite effect on importer purchasing power, making Faroese, Norwegian and wild US salmon more expensive. Consumer demand in the UK for salmon is still growing, however, and a recent Nielsen report shows a 6.1% increase in total volume purchased over the period up to April 23.

Markets

The persistent resilience of market demand in the face of ever-rising prices highlights the success of the farmed salmon industries' marketing and innovation efforts over the past few years. The suitability of salmon for use in convenience food products and its uniqueness and palatability compared with other seafood options has shielded it from price competition from other species, and has ensured that demand growth in developing markets is exerting maximum upward pressure on prices. Considering that the three largest developing markets, Russia, Brazil and China are all currently in relative economic lulls, it remains to be seen exactly how high prices can be driven by booming global salmon demand if supply options remain limited.

France
After an extended period of consumer aversion to farmed Norwegian salmon due to negative publicity, French buyers are now turning to Norwegian suppliers once again in order to meet seemingly unstoppable demand for salmon. Retailers have allayed consumer fears to some extent through ecolabels such as the Aquaculture Stewardship Council, and although presenting significant challenges to smokers and other contract-supplied intermediaries, soaring prices are having limited impact on consumer-side demand.

Total French import volumes in the first quarter of 2016 were 13.2% higher than quarter one 2015, to total 39 400 tonnes, despite a 12% increase in the average price of fresh whole Atlantics to EUR 6.3 per kg.

Germany
Similarly to their French counterparts, German consumers' demand for salmon has been remarkably resistant to inflated price levels. After a dip last year, German imports of salmon were up 6.4% in the first quarter of 2016 in volume terms, with increases for both fresh and smoked salmon even as prices rose.

German consumers' preferences are somewhat different to those of the French, with more interest in preserved and prepared convenience products and seemingly less concern with product origin. However, fresh salmon sold largely through discount chain retailers is also a popular choice for German customers.

Japan
The strengthening of the yen has boosted Japanese importer demand for frozen farmed coho from Chile to replenish inventories, although the supply squeeze resulting from the algal bloom mortalities is yet to be fully felt.

As of late May, prices climbed back above 2015 levels in yen terms, and can be expected to continue their climb as supply tightens. Buyers are also having to pay more for fresh Atlantic salmon given the elevated global price level, although Atlantics constitute a much smaller proportion of the Japanese import market.

USA
During the first quarter of 2016, the USA imported 93 300 tonnes of salmon worth USD 721.5 million. The figure represents an increase of 9.4% in volume terms and a decrease of 1% in value terms compared with the same period of 2015.

Chile was the US's main salmon supplier during this period, having exported 38 400 tonnes, which was a 13% increase. In terms of value, a decrease of 4.7% was registered (USD 319 million).
Canada was the second largest supplier to the USA, exporting 23 000 tonnes worth USD 149 millions.
For US exports of salmon, there was a slight decrease (-0.68%) in salmon shipments and -10.84% in terms of value. Wild salmon harvests in Alaska, particularly pink and sockeye salmon, are expected to be lower in 2016 after a supply glut in 2015. With farmed salmon prices now so high, there are calls for the Alaskan industry to focus on improving the quality of their post-harvest product so that they may better establish themselves in the same segments as farmed rather than being restricted to the canned market where price levels are not so appealing.

Outlook

The global salmon market, from producer to consumer, has to now come to terms with a new price plateau. Norwegian farmers will continue to reap the benefits of physical and regulatory limits on supply. In Chile, the business implications of new regulations are more complicated for its industry considering the additional costs entailed by sanitary requirements despite the obvious price benefits of slower and regulated production growth. Worldwide, the processing sector, facing soaring raw material prices, will likely need to consolidate to drive costs down, while big retail chains will use their market power to resist passing prices onto consumers for as long as possible. For wild salmon producers, however, this may be seen as an opportunity, particularly if product innovation and improved quality control can more closely integrate the wild market with that for farmed fish.

The report analyses the market situation over the period January-July 2016

 

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