September 10, 2015
Fishmeal bottoms out amid cooling Chinese demand, warming ocean waters
A poor Chinese aquaculture season, financial panics and accidents have all worked to deflate fishmeal but deteriorating supply-side fundamentals willoutrace any resulting fall in demand.
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Despite all attempts at finding alternative inputs rich in the same amino acids and fatty acids, world aquaculture still precariously depends on fishmeal. Here, from both a short-term and longer term perspective, the news is not good.
Slack China aquaculture, financial panic deflates prices
After deflating on  a mix of a poor Chinese aquaculture season, falling demand and unexpected logistical issues, fishmeal's price appears to have bottomed out, having fallen 33%, from the US$2,400/tonne (not including shipping costs) near the start of 2015 to US$1,550/tonne before rebounding to slightly over US$1,600/tonne as of mid-September. Although the demand side news is almost as bearish as the supply-side situation, the prognosis is for supplies to tighten up by even more than any fall in consumption.
Following a poor start to this year's aquaculture season, China (which absorbs 60% of world fishmeal exports) endured, a succession of stock market crashes, disrupting everything from consumer demand to its ability to finance imports, including of fishmeal.
Later, a massive chemical explosion in the port of Tianjin cast a cloud over whether fishmeal shipments could even enter China. Fishmeal was classified by China's government as "hazardous cargo" in 2005.
This never mattered until after Tianjin explosion occurred. Peruvian fishmeal exporter MSI Ceres S.A.C. stated in its newsletter that, "The Tianjin accident is having a domino effect on regulations for dangerous goods cargo, with other China ports –especially at Huangpu, where shipping lines are being informed that they cannot transport dangerous goods, including fishmeal, to other Chinese ports." Hammersmith Marketing's Bacon concurs "That, there is concern in Peru that the chemical explosion in Tianjin could affect fishmeal imports as fishmeal is considered a "dangerous cargo". Reports say that some fishmeal shipments have not been unloaded due to the concern over the dangerous cargo classification of fishmeal."
Normally, such an unexpected import blockade would lead fishmeal's price rising in China, but falling in the rest of the world, where fishmeal cargoes without a final destination are, by implication, deflationary. Although the unwillingness of Chinese ports to accept Peruvian cargoes deflated world fishmeal prices, they did not do much to boost the cost of fishmeal in China itself. 
Low swine numbers depress consumption, conserve supplies
Due to slack consumer demand and ill-timed typhoons, China, which accounts for 70% of world aquaculture, has had a bad growing season. As a result, fishmeal stocks, which had fallen from over 200,000 tonnes two years ago to below 30,000 tonnes at the turn of the year, rebounded sharply. By MSI Ceres' estimates, as of mid-September, they total 120,000 tonnes. This is down from 200,000 tonnes in early August but with its aquaculture season winding down, the potential for running down inventories much lower is limited.
Moreover, China's swine sector, which accounts for most of the country's Q4 and Q1 fishmeal demand, is also in a severe slump. Hog inventories peaked at a USDA estimated 474 million head in early 2014 and have fallen 13% in two years, and are projected to total 412 million at the start of 2016. This means that after a poor aquaculture season, logistics and financial issues curtailed China's need for fishmeal, its hog sector's fishmeal consumption will also be unusually low. This will leave China's first quarter 2016 fishmeal inventories higher than was initially expected.
Chinese port prices reflect these market shifts, having fallen 34% from their peak of RMB16,000/tonne (US$2,550/tonne) early this year to RMB10,500 (US$1,643/tonne) by mid-September [Note: US dollar equivalent also reflects change in China's currency value from February to September of this year]. While fishmeal demand was roughly constant in the rest of the world, China market's troubles dragged down its price from record levels after its late 2014 anchovy catching season was cancelled.
Inflation to resume on strong El Nino
Going forward, while possible October market crashes could further pull down prices over the short term, from late 2015 onwards, the deflationary news ends and the market trend looks inflationary. The El Nino event currently underway in the equatorial East Pacific Ocean has been worrying the industry all year long.
At the very least, it will probably keep Peru's anchovy catch low for a fourth consecutive year. On the positive side, ocean temperatures off the Peruvian coast peaked at 3C above normal in mid-year and are now 2C above normal. On the negative side, this is still enough to significantly reduce Peru's anchovy catch. For now, meteorologists forecast that warm water El Nino conditions will intensify off equatorial South America late this year, possibly to more than 3C above average temperatures.
Not even taking the forecasted El Nino into account, Peruvian exports, after falling to roughly half a million tonnes in 2014, rose to a USDA estimated 850,000 tonnes this year. The USDA forecast, which was made before the current El Nino formed, projects 2015 exports at 950,000 tonnes
Many in the industry doubt enough anchovy to make 950,000 tonnes of exports can be caught. Furthermore, even this amount is far below the 1.3 to 1.9 million tonnes Peru exported in from 1998 to 2012 –when world aquaculture production was, on average, much lower than it is today. With Peru accounting for half of world exports, there is no way the other four top fishmeal exporters can plug the impending supply deficit.
Granted, Peru is already preparing contingency plans for such a possibility. Piero Ghezi, Peru's production minister said that his cabinet will decide based on late September ocean surveys, whether to pull the late 2015 anchovy fishing season's start forward a month. By commencing fishing in October rather than November, it is hoped that fishing losses arising from anchovy fleeing a late year El Nino's warm waters can be avoided.
With this expected to be one of the strongest El Ninos recorded and waters off Peru expected to be abnormally warm from November through to February, there are many who think that the anchovy fishing quota will be reduced. Bacon reports that instead of the usual 1.5 million tonnes, "Water temperatures off Peru are significantly higher than normal and there may be a major effect on the available fish. There are also feelings that the quota for the next Peru fishing season may only be at about 1 million tonnes of catch."
Hence, while deflationary clouds are forming over the crucial Chinese market, these, at the present time, look to be more than counterweighted by the prospect of an abnormal, third consecutive year of less than a million tonnes of Peruvian fishmeal exports. Once the Q4 2015 risk of liquidity-squeeze deflation passes, anchovy catches have nowhere to go but down and fishmeal looks likely to rise towards its recently set price record.

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