March 3, 2015
A pause in fishmeal's relentless uptrend?
A rebounding anchovy population, slack European buying interest and cooler ocean currents point to softer prices ahead, but technical indicators imply that its long-term uptrend remains firmly in place.
By Eric J. BROOKS
An eFeedLink Hot Topic
A combination of seasonally low winter time demand and hope has levelled out a formerly hyper inflating fishmeal market. It follows a year when Peru, which accounts for a third of global production and approximately 50% of fishmeal exports, saw its anchovy catch plunge. Decades of overfishing left them in a precarious position, such that a regular ocean current cycle was enough to make them profoundly scarce.
El Niño + overfishing karma
With warm El Niño ocean temperatures driving anchovy to Peru's southern coastline where fishing is not allowed, by early August, only 68% of the Peruvian government's quota of fish had been caught. According to Elena Contern, president of Peru's National Societies of Fisheries, from the usual 5.0 to 6.0 million tonnes usually caught from 2000 to 2011, 2014's anchovy catch crashed to 2.3 million tonnes.
Alarmed that only 1.45 million tonnes of anchovy biomass was found (compared to 10.8 to 12.1 million tonnes a year earlier), Peru's government was forced to cancel the November 2014 to February 2015 fishing season. By that time, the total January to November catch had fallen 69% from a year earlier.
According to a study by ScotiaBank Economic Research, the dominant exporter's steep production drop led to world fishmeal exports dropping approximately 17% by volume and 4% by value at a time when aquaculture production rises by more than 5% annually.
Supply recovery, price divergence
Fortunately, barring an unforeseen (and highly unlikely) second year of abnormally high east Pacific Ocean temperatures, the market is becoming more favourable for buyers. The first quarter of 2015 has seen fishmeal prices fall slightly and diverging by region.
On one hand, in the west, by early March, some cargoes are trading for as low as US$1,700/tonne to US$1,800/tonne. On the other hand, with domestic inventories depleted, at Chinese ports, the top aquaculture producer's fishmeal prices were still stuck in record high territory, with various grades trading from RMB14,000 (US$2,230/tonne) to RMB16,000/tonne (US$2,450/tonne). Overall, going into March, the IMF still found fishmeal's average price across all grades well above US$2,100/tonne, down less than 5% from its all-time high in late 2014.
This slight softening of prices is due to a number of supply and demand factors. Based on reports by IMARP (Peru's Marine Research Institute), anchovy off Peru's coast are rebounding, with population of baby anchovies tripling between August and November of last year.
With these fish due to mature soon, a study by ScotiaBank Economic Research optimistically predicts that Peru's anchovy catch will make a partial recovery, up 53% to an estimated 3.5 million tonnes in 2015. That is still far below the 5 to 6 million tonnes normally caught since the late 1990s –or even the 4.8 million tonnes caught in 2013: A return to post-2000 catch levels will require several seasons of cool ocean temperatures, and restraint so as to not overfish.
More exports, same avg. price, different market direction
Erika Manchego, a senior analyst at ScotiaBank who directed the study expects that, "In line with the volume of anchovy [being caught], we anticipate an increase in production of fishmeal to about 800,000 tonnes in 2015." Coming off an exceptionally bad year, this is a far cry from the 1.0 million to 1.8 million tonnes caught annually most years since the mid 2000s. Nonetheless, if the forecast holds, it will be a great improvement over last year's supply shutdown and less than 500,000 tonnes output.
Assuming that Peru consumes 10,000 tonnes of fishmeal domestically as it has in recent years, it will probably also opt to put 40,000 tonnes back into its near-depleted inventories. Hence, based in a 3.5 million tonne estimated anchovy catch, 750,000 tonnes of the 800,000 tonnes of fishmeal produced would be exported. Statistically speaking, that is a 50% rise from 2014's export volume, which sounds impressive –until you realized that from the late 1990s through to 2011, Peru usually exported anywhere from 1.0 to 2.3 million tonnes of fishmeal annually.
Assuming other countries export the same amount they did last year, this will leave the physical quantity of world fishmeal exports to be 12% higher than in 2014. The fact that ScotiaBank projects the value of world fishmeal exports to also rise 12% assumes that its average selling price will be slightly over US$1,900/tonne, approximately the same as it was in 2014.
Of course, the path by which this average price is made will be totally different this year. In 2014, the above described Peruvian fishing woes pushed its cost from just under US$1,550/tonne in January 2014 to US$2,400/tonne in December. This year, prices are down but can only fall so far.
Going into the late first quarter, South American fishmeal was trading for slightly under US$2,000/tonne in Europe, with supplies from Iceland coming in several hundred dollars a tonne cheaper. Early 2014 also saw large aqua feed suppliers announcing that they have developed feeds with comparable fatty acid profiles and far less fishmeal inclusion. Nutreco, for example, has reduced its shrimp feed fishmeal content by two-fifths, from 25% to 15%. This will, over time, help bring fishmeal's demand in step with the secular, ongoing decline in supplies.
On the other hand, prices in China were still stuck above US$2,250/tonne, the country's inventories have fallen from several hundred thousand tonnes to below 30,000 tonnes over the last two years. With China's aquaculture season coming up, a country that single-handedly accounts for the majority of world aquaculture production needs to re-enter the market in a big way.
Hence, in the early second quarter, Chinese market weight will counterbalance Europe's low buying interest, keeping fishmeal above US$2,000/tonne. Moreover, even if anchovy numbers keep recovering strongly, with IMARP reporting that most fish were still juvenile in early 2014, they will only mature enough to make for a large supply increase later this year –well after China finishes its large, impending second quarter buying exercise and its aquaculture season starts winding down.
Nevertheless, once China has covered its 2015 fish farming needs, rising Peruvian production should bring prices down to the US$1,600 to US$1,700/range, keeping the average price for this year near US$1,900/tonne, virtually unchanged from 2014.
--But do note: While the above rationalization is reasonable, you should be warned that Southeast Pacific Ocean current ocean current temperatures have a mind of their own. On one hand, a return to warm El Niño's warm ocean temperatures could easily send fishmeal above US$2,500/tonne. On the other hand, a sudden plunge into an ultra-low La Niña temperature range could greatly multiply anchovy stocks, sending prices below US$1,500/tonne.
Having been in the El Nino phase for the better part of a year, it is likely -but not guaranteed –that equatorial eastern Pacific sea temperatures will fall. Even if they fall, whether they enter the anchovy-friendly La Niña phase is always a matter of probability. A 1°C to 2°C fluctuation in the sea surface temperature off South America is all that separates one outcome from the other!
Long-term trend implies high price bottom
Such uncontrollable oddities of weather conditions notwithstanding, there is also a technical analysis based reason to believe that fishmeal will likely settle in the US$1,700 to US$1,900/tonne range: As the accompanying chart shows, while fishmeal's price fluctuates with great volatility, its average yearly price moves in a more predictable manner: From an average yearly price of US$650/tonne in 2003 to US$1913/tonne in 2014, fishmeal has risen, on average, by roughly US$115/tonne annually.
Fishmeal's price foreshadowed overall feed cost inflation and went above its long-term trend in the mid 2000s. Subsequently, it stayed below trend during the 2008 financial crisis and the world recession that followed. A Chilean earthquake that disrupted its fishmeal production coincided with a global economic recovery, sending it above trend. Subsequently, a late 2012 to early 2013 recovery in anchovy numbers sent production and prices in opposite directions for a year.
It stayed below its long-term price trend from mid-2013 to mid-2014. Thereafter, last year's El Niño induced anchovy population reduction again strongly boosted fishmeal's cost well above its long-term trend line.
Barring the re-occurrence of warm, anchovy-unfriendly Pacific Ocean temperatures, fishmeal is now due to enter that part of its market cycle where it temporarily falls below its long-term uptrend.
However, with fishmeal's average long-term price now having risen into the US$1,900/tonne range, barring an international macroeconomic crisis, it cannot fall much more than US$400/tonne below its long-term trend for too long. Although record prices have pushed fishmeal inclusion rates down to new lows, only the invention of a fully substitutable, sustainable and cost-effective alternative protein meal can break the secular, long-term uptrend in the cost of this vital aqua feed commodity.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.
