What to expect in European white fish markets? Rabobank Group RaboResearch Food and Agribusiness October, 2018 Gorjan Nikolik
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I Groundfish: A sector with fairly stable supply and commodity prices Photo: Shutterstock 2018
Groundfish production is stable and sustainable, with a stable supply outlook Global groundfish (key species) supply and forecast Million MT 9 8,5 Overfishing period 8 7,5 TAC increase Stable supply 7 Biomass Recovery period 6,5 6 5,5 5 4,5 4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: FAO, Groundfish forum, Rabobank 2018 4
Atlantic Cod follows a similar pattern of the larger ground fish category with a minor contraction recently Atlantic cod TAC development 1.600 1.400 1.200 1.000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E Norway Russia EU Iceland Faroes / Greenland / Canada / USA Source: FAO, Groundfish forum, Rabobank 2018 5
There is some growth in EU import of ground fish products, the majority of which are traded frozen Millions of MT 1.400 1.200 7% 2% -3% 6% 3% 1.000 800 600 400 200 15% 5% 3% - -15% - 2012 2013 2014 2015 2016 2017 Fresh Frozen Source: UN Comtrade, Rabobank 2018 6
In Norway there is a gradual increase in Atlantic Cod prices but only recently surpassing 2011 price levels Atlantic Cod prices in Norway Cod prices in NOK/kg 40,0 35,0 30,0 25,0 20,0 15,0 10,0 Jan 2011 May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May 2012 2013 2014 2015 2016 2017 2018 Sep Fresh Frozen Source: Rafisklaget, Rabobank 2018 7
But in the years of stable supply prices have stayed the same or have even decreased. Why is that? Groundfish commodity prices in the US us/lb Cod products 4,5 Pollock block 1,2 4,0 1,0 3,5 0,8 3,0 2,5 0,6 2,0 03/01/2011 03/01/2012 03/01/2013 03/01/2014 03/01/2015 03/01/2016 03/01/2017 03/01/2018 0,4 UB Cod, Sknls/Bnls, Loins, Double Fz, Atlantic 7 oz - Low $/lb UB Cod, Sknls/Bnls, Shatt, Double Fz, Atlantic 8-12 oz - Low $/lb UB Pollock, Block, Alaskan Minced, FOB New Eng - Low $/lb Source: Urner Berry, Rabobank 2018 8
II Intensely competitive white fish processing industry Photo: Shutterstock 2018
Despite stable supply, the ground fish sector is often described as an intensely competitive sector Frozen product easy to store and transport Fairly commoditised products in a mature market Competition is global or at least continental Retailers quickly change from one supplier to the other Result: highly competitive sector with low margins for processors Source: Rabobank 2018 10
but there is more to this and we need to go back 5-10 years and look at the ownership of the industry back then Branded players in white fish / seafood processing across Europe had high leverage In NW Europe most branded companies were PE owned Southern Europe dominated by one Family / listed High leverage after multiple PE owners Extreme level of (hidden) leverage Short term / cash flow focus Eventually leads to bankruptcy Focus on cost cutting to service debt Source: Rabobank 2018 11
The high leverage was combined with intense price competition from PL suppliers Although many companies have PL products one Chinese owned company became both the dominant raw material supplier and processor of PL white fish in Europe A Chinese (also highly leveraged) company become the largest PL white fish supplier Market share gain focus to achieve scale in processing in China and sourcing in Russia Strategy: Undercut competition with low prices Result: Industry wide focus on price competition and cost cutting Source: Undercurrent, Rabobank 2018 12
This leads to the a toxic combination which inevitably results in financial difficulties, bankruptcies and consolidation High leverage Intense price competition In time nearly all the producers in this sector experience financial difficulties, get acquired or become part of bigger groups.. This process of rationalization is not over yet Combination of focus on cost cutting i.e. lack of marketing and differentiation by branded players and a PL supplier focused on market share acquisition based on low cost product leads to a race to the bottom 13
III Fresh water - farmed species: declining in both EU and US Photo: Shutterstock 2018
The Vietnamese Pangasius industry is moving away from Europe due to a poor image (fake news) Vietnamese Pangasius Exports to China in value Million USD 700 600 500 400 300 200 100 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 USA Europe China Source: VinHoan, Ground fish forum, Intrafish 2017 15
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Competition in the US market is fierce with Vietnamese Pangasius gaining market share but both species loosing volume Tilapia and Pangasius import in the US market (2017 YTD December) Million lbs. 700 60% Frozen fillet prices of Tilapia and Pangasius in the US market (2018 YTD July) USD per lb. 600 500 400 371 352 364 348 283 50% 40% 3,3 3,0 2,7 July, 18: USD3.13 The US has imposed largest ever antidumping tariffs on Pangasius fillets. 300 332 292 264 30% 2,4 200 20% 2,1 100 124 194 214 227 215 237 288 230 10% 1,8 0 2010 2011 2012 2013 2014 2015 2016 2017 0% 1,5 Pangasius Fz Fill Tilapia Fz Fillets Market share of Pangasius Tilapia Pangasius Source: Urner Barry, Rabobank 2018 16 21
Surprisingly today China is by far the largest market for Vietnamese Pangasius Vietnamese Pangasius Exports to China in value Millions USD 450 400 350 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2017E Source: UN Comtrade, VASEP, Intrafish, Undercurrent, Rabobank 2018 17
Many Tilapia and Pangasius exporters are changing focus away from EU and US due to poor image and weak margins Chinese Targets US with Frozen Tilapia fillets Dominates market with a low price product for years Rejected Tilapia products are sold in China, below cost Losing competiveness in US. New focus on RoW, domestic market and Africa? China will be in oversupply with white fish Panga initially targets EU (due t problems with US domestic catfish) EU market flooded with low cost Panga filets, but image problems hamper demand Re-focus to US, low price to acquire market share EU and US decline New focus on the Chinese market? Observation: Both tilapia and pangasius frozen fillet suppliers seem to put little emphasis on gradual market development and cooperation with local processors, but focus on supply growth, price competition and new markets development Source: Rabobank 2018 18
IV New owners of white fish assets Photo: Shutterstock 2018
Firstly there are a number of salmon farming companies taking a greater role is the white fish value chain Source: Undercurrent news, Intrafish, Rabobank 2018 20
Unlike in the ground fish sector salmon prices tend to be more responsive to supply (especially to contractions) Norwegian fresh salmon prices (left axis) and yearly global supply changes (right axis) NOK/kg 90 22,5% 80 25% 20% 70 60 12,2% 15% 50 40 2,0% 9,0% 4,3% 5,0% 7,2% 10% 5% 30 20 10 0-1,4% -1,3% -6,7% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 0% -5% -10% Yearly % change in supply Norway whole salmon spot price (NOK/kg) Source: Fish pool, Rabobank 2018 21
Salmon sector claims to be very customer oriented and innovative, can they replicate this in the ground fish sector? Growth of Pre-Packed salmon in Germany Million Euro 120 100 +31% 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017..But it is also a farmed product with consistent supply, a fresh product, rich in Omega3 fats, with a consolidated supplier base Growth of Pre-Packed salmon in US Million USD 70 60 50 40 30 20 10 +133% Source: Marine Harvest, Rabobank 2018 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 22
Large family owned wild catch companies also enter into the European white fish value chain Source: Undercurrent news, Intrafish, Rabobank 2018 23
And most importantly a large part of the industry is now part of listed multispecies food conglomerates Source: Undercurrent news, Intrafish, Rabobank 2018 24
The market leader Nomad is showing that the new strategy is reversing the decline into growth Organic Revenue growth per quarter as reported by Nomad Foods 8% 6% 5,9% 5,6% 4% 3,5% 2,9% 2% 1,1% 1,3% 0% -2% -0,8% -4% -3,8% -3,3% -2,7% -6% -8% -5,4% -8,0% -7,0% -6,1% -10% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Organic Revenue Growth Source: Nomad Foods Q2 2018 Rabobank 2018 25
Although the Russian white fish companies are not new-comers they are themselves undergoing a transformation 26
While Pollock still mostly going to China (for re-processing) Russian exports of Cod to the EU have increased Russian Cod exports Value, per import region Russian Pollock exports Value, per import region Million USD 700 Million USD 1.200 600 500 900 400 300 600 200 300 100-2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-2012 2013 2014 2015 2016 2017 China EU Rest of the World China Rest of the World Source: UN Commtrade, Rabobank 2018 27
Although a diverse group there are some common features of the new entrants into the whitefish processing space Highly profitable, companies with low leverage Diversified multispecies platforms e.g. salmon, wild catch species, animal proteins Or vertically integrated companies Mostly listed and family owned companies with a long term view..and many are consolidators so expect more transactions in this space Source: Rabobank 2018 28
So what could be the new dynamics in white fish markets? Innovation / product development / marketing focus (as opposed to price and cost focus) New brands? Suppliers have a broader range of product and can become category managers and work closer with retailers Perhaps more focus on fresh products? Fewer double frozen products? Value based growth and improving profitability? Source: Rabobank 2018 29
Contact Us Rabobank Gorjan Nikolik Senior Analyst Seafood Telephone +31 30 712 3825 Mobile +31 6 1243 2463 E-mail gorjan.nikolik@rabobank.com This document is meant exclusively for you and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced, or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable; however, Rabobank does not guarantee the correctness or completeness of this document, and does not accept any liability in this respect. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas, et cetera contained in this document. This document does not constitute an offer, invitation, or recommendation. This document shall not form the basis of, or cannot be relied upon in connection with, any contract or commitment whatsoever. The information in this document is not intended, and may not be understood, as an advice (including, without limitation, an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, the Netherlands has exclusive jurisdiction to settle any dispute which may arise out of, or in connection with, this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of RaboResearch Food & Agribusiness. 2018 - All Rights Reserved. 30