January 2, 2004

Will the US Mad Cow Disease Incident Stimulate and Reverse Fishmeal Price Trend in China?

An eFeedLink Exclusive Report

Soybean futures surged in both China and overseas markets in the last week of December on the back of the US mad cow disease incident. Consequently, spot prices of soymeal have generally risen by RMB150/ton in China.

The upward movement of soymeal prices spurred the improvement of the domestic fishmeal market. From December 29, 2003, the previous downslide in fishmeal prices at major Chinese ports was curbed. Specifically, fishmeal prices at Shanghai and Huangpu ports began to pick up marginally. At the two ports, price quotes of 64% protein FAQ Peruvian fishmeal rose from RMB5300/ton to the RMB5350-5400/ton level, while the actual transacted prices were between RMB5250-5300/ton. This was the first reversal of a falling price trend after fishmeal prices had reached a high of RMB5800/ton in late October 2003.

This rebound in fishmeal prices was of course indirectly influenced by the US mad cow disease. Most market participants anticipate that Chinese feed millers would reduce the use of meat and bone meal and seek other substitutes of raw protein material for feed production, such as soymeal and fishmeal. In the long term, the mad cow disease incident in the US would favorably influenced China's fishmeal market. 

On the other hand, the latest price hikes of soymeal also play a key role in generating a favorable soymeal market outlook in China. Coupled with the Chinese New Year holidays only 3 weeks away, feed millers in China are expected to increase their fishmeal inventories by an appropriate quantity.

Given the aforementioned market situation, many market participants question whether China's fishmeal market will be able to sustain its bullish outlook. Market analysts feel that prices will stabilize before the Chinese New Year holidays and is unlikely to maintain any sharp increases. The contributing factors to this price trend are analyzed as follows:

• Firstly, the demand for fishmeal in China is currently in the off-peak season. Although procurement from feed millers before the Chinese New Year holidays could slightly increase the demand for fishmeal, feed millers are generally incurring losses for the past year and they have limited working capital for purchasing large quantities of stock. Moreover, with the rising prices of soymeal and corn, feed millers have injected most of their capital in the purchase of these commodities. Even if feed millers were to increase their stockpiles of fishmeal, the amount would not be substantial;
  
  
• Secondly, in the first two months of 2004, increasing amounts of fishmeal will be arriving at major Chinese ports. As such, fishmeal supply in China market will be adequate in the near future. Although the cost of imported fishmeal are increasing, the financial strength and sales practices of importers and traders are varied and this would inevitably result in a divergence in price quotes;
  
  
• Thirdly, the partial ban on fishing activities in the Peruvian seas will be lifted on January 3, 2004. By then, full scale fishing activities will resume and the market supply of fishmeal will begin to increase again. It will be difficult to forecast the new fish haul. However, if the fish hauls mirror the period prior to the fishing ban, when fish hauls reached one million metric tons, then fishmeal prices in the Peruvian market will fluctuate and vary accordingly;
  
  
• Fourthly, the recent price increase in fishmeal is a 'double-edged' sword. The buying strategy of "buy before further price hikes and hold purchase when prices are falling" will prompt feed miller's buying interest. However, at the same time, due to the higher purchasing cost, feed millers will be negatively influenced not to buy more than just for immediate consumption. Importers and traders would not like the situation whereby increasing prices are not matched by rising volume. 

Concluding, given the gradual but considerable increase in supply and the forecast weak market demand, market analysts feel that recent price rebounds will not be sustainable in the near term only.