January 3, 2014
Is the fishmeal market about to stabilise?
A supply-side recovery collides with a China-led slowdown in import demand. This protein meal's next move depends on Chinese aquaculture -and the cost of soy.
by Eric J. BROOKS
An eFeedLink Hot Topic
It has been a year of turnarounds for the world fishmeal market. It panicked itself into setting a new price record of approximately US$2,190/tonne in the first quarter of last year but by early 2014, the market was deflated by over a third, closing near US$1,400/tonne by early January 2014. We examine this market's roller coaster and the market's most likely next turn below.
Today's situation started in the first half of 2013, when the catching of too many young anchovies in late 2012 and prevailing warm water conditions made for a 21% drop in Peru and Chile's combined catch. Although this was offset by slightly higher production in Norway, the net result was a 13% drop in H1 2013 fishmeal output compared to a year earlier.
Supplies rebound
Coinciding with relatively low Chinese inventories just before the start of a new aquaculture season, early 2013's disastrously Peruvian catch scared the market to record price levels. But the nervousness over tight supplies was short lived.
Ocean temperatures off South America's west coast fell from 2012's abnormally high levels (which discourage anchovy reproduction) to slightly cooler than average levels conducive for breeding, and stayed there for most of the past year. Along with strict Peruvian fishing controls when their population fell in early 2013, this caused a strong recovery in anchovy numbers -and a very good fishing season -in the latter half of 2013.
For example, in early December, 50% of the mandated Peruvian government anchovy quota had been caught. By the start of January, 2.0 million tonnes or 87% of the Peruvian quota had been caught, implying the full 2.3 million tonnes of anchovy catches permitted will be reached by late January.
With the H2 2013 catch running strongly ahead of the previous half year's pace, after a poor start, Peru beat all expectations, producing 23.4% more fishmeal in 2013 than in the previous year. With Peru's anchovy catch making an impressive recovery and other major producers' catch either flat or marginally higher, Peru, Chile and Iceland produced 14.8% more fishmeal than they did in 2012.
This led to a 30% increase in Peruvian fishmeal exports, from 1.15 million tonnes in 2012 to 1.49 million in 2013. This resulted in the combined exports of Peru, Chile and Iceland (which provide 70% of world market supplies) rising 22% over the previous year's level.
Demand sags, China withdraws
But while supply-side fundamentals rebounded nicely, this year's fishmeal demand was disappointing. Cold weather made China's aquaculture season start late and finish in fewer days than in most years. Along with the record high fishmeal prices in the first half of last year, this discouraged importers from buying as much fishmeal as anticipated. Rather than buy such expensive fishmeal, China opted to keep low inventories.
As a result, China imported a USDA estimated 1.27 million tonnes, only 2.5% more than it did two years earlier in 2011. This is in marked contrast to the years 1998 to 2011, when China's imports of fishmeal increased by an average of 6% a year. In fact, for the first time in well over a decade, China's share of world fishmeal imports fell from the near 55% level we are used to seeing to 48%.
China's reluctance to buy more fishmeal was partly offset by the EU and Japan, which bought 16.7% and 26% more fishmeal than the previous year -but even so, their combined import volumes were 35,000 tonnes below 2011 levels. Other major importers such as Indonesia, Canada, the US , Taiwan or South Korea were importing an immaterial 2,000 to 5,000 tonnes more or less fishmeal than two years ago. With the importers buying roughly the same amount of fishmeal they did two years ago and the combined exports of Peru, Chile and Iceland (which provide 70% of exports) up 22% in one year, a surplus was created.
By early 2014, fishmeal cost roughly 35% less than it did a year earlier, when it set a price record. But while prices have fallen sharply, fishmeal remains historically expensive and several factors at work are providing price support.
For one thing, after three disastrous years pock-marked by an El Nino and Chile's earthquake coinciding with high Chinese demand, much of 2013's overproduction went into rebuilding exporter inventories, which had languished at razor thin levels for nearly three years. Closing Peruvian inventories are climbing 28%, from 18,000 tonnes to over 23,000. -But this is nowhere near the 108,000 tonne level that caused 2006's serious price crash. Indeed, exporter inventory increases are more than counteracted by the inventory decline in the China, which absorbs nearly 60% of annual fishmeal exports.
At an IFFO-estimated 124,000 tonnes, China's closing port fishmeal inventories are 24% or 40,000 tonnes below their 2008-12 closing average of 165,000 tonnes. As a general rule, Chinese port inventories below 150,000 tonnes set the stage for an inflationary market but the current situation is an exception to the rule: The country's thin fishmeal port supplies are staring at a good late 2013 Peruvian anchovy catch and the rebuilding of exporter country inventories.
Meal quality, price ratio with soy provide support
But while the quantity of available fishmeal increased, its quality has deteriorated, and this has market implications: This year's Peruvian catch is showing lower than usual level of fish oil (which contains omega 3 fats) and above average levels of free fatty acids. This means that it will take more raw anchovy inputs than usual to create a unit of fishmeal with a specified amount of omega 3 fat. Although this boosts all production costs and prices, it increases the cost of high quality fishmeal more than that of lower grade varieties. This implies that the spread between high and low fishmeal grades may widen as this year's catch is processed and reaches market.
Furthermore, it should be noted that the soy/fishmeal price ratio, has fallen from its level of 4.4 a year ago to approximately 3.2. This is still outside fishmeal's normal 20th century price range of 2.5 to 3.0. However, since the supply of soy is elastic but fishmeal is inelastic, the price ratio assumption that a level above 3.0 implies too high a fishmeal price no longer applies.
With the amount of fishmeal given to hogs (which traditionally required a fishmeal/soy ratio below 3.0 to be economical) no longer as relevant as it used to be, a fishmeal/soy price ratio of 3.0 to 3.5 can be considered the 'new normal." -provided soymeal's price does not change much, a 3.0 fishmeal/soy price ratio implies that sometime before China's aquaculture season starts, the lowest fishmeal grades will bottom out no lower than US$1,300/tonne.
Hence, low Chinese supplies, the need to rebuild exporter inventories and a reasonable fishmeal/soymeal price are being counterbalanced by one of the best Peruvian catches in years -and a sudden tapering off of Chinese fishmeal demand growth.
Over the longer term, if Peruvian anchovy catches stay constant and high fishmeal costs cause China to curtail its need for imports, flat world fishmeal demand could dovetail with a stabilizing of anchovy catches at present levels, making of a period of high but stable fishmeal costs.
Over the short-term, only if chilly weather delays the start of China's aquaculture season, or a large South American soy crop coincides with tightening monetary conditions can fishmeal's price fall much more than it has up to this time.
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