January Icelandic Seafood Market Report

January 2018 Icelandic Seafood Market Report

Publisher: Íslandsbanki Research: greining@islandsbanki.is Elvar Orri Hreinsson, + 354 440 4747 Albert Freyr Eiríksson +354 440 4638 Issue date: 22 January 2018

Summary Iceland s total fish catch over the first nine months of 2017 was 915,000 tonnes, about 64,000 tonnes (7%) more than over the same period in 2016. The difference is due mainly to an increase in the capelin catch. The total catch in 2016 was 1,067,000 tonnes, an increase of 19.1% (252,000 tonnes) over and above 2015. The most-caught species during the year was capelin, at 264,000 tonnes, an increase of 8% (20,000 tonnes) from 2015. 2016 was affected by the failure of the capelin catch, which contracted by 73% (246,000 tonnes) year-on-year. The 2016 catch value totalled just over ISK 133 bn, a decline of 13.5% YoY at 2016 prices. Nearly 580,000 tonnes of marine products were exported in 2016, some 8.2% less than in 2015 and about 128,000 tonnes below the long-term average. The year-on-year contraction is due largely to reduced catches. Year-2016 export values totalled about ISK 232 bn, nearly ISK 37 bn (14%) less than in 2015, at 2016 prices. Cod was the most valuable export species in 2016, with a value of ISK 100 bn, about 43% of total marine product export values. The export value of marine products accounts for 20% of Iceland s foreign exchange revenues from goods and services trade. The export value of farmed fish was about ISK 9,618 m in 2016, as opposed to ISK 7,144 m in 2015, at constant prices. As before, the US was the largest market for Icelandic aquaculture products, with about 25% of total value in 2016, followed by Germany, with about 17%, and the UK, with roughly 13%. Salmon was the leading aquaculture species in Iceland in 2016, at 8,420 tonnes, an increase of 5,160 tonnes YoY. About 4,084 tonnes of Arctic charr were farmed, or 147 tonnes more than in the prior year. In addition, 2,138 tonnes of rainbow trout and 59 tonnes of cod were farmed. Production authorised under aquaculture permits is concentrated in the West Fjords and West Iceland, where permits have been issued for production totalling 21,498 tonnes per year, a reduction of 234 tonnes between years.

Foreword Iceland has established itself among the world s leading fishing countries, currently ranking 19th globally. The fishing sector ranks second in export revenue generation for the Icelandic economy and is an inextricable part of Iceland s culture and business sector. Iceland s fishing industry is strong by these criteria and others, and we can be proud of being one of the most successful fishing countries in the world. The global competitiveness of Iceland s fishing sector has diminished in the past year, however, owing to the steep appreciation of the Icelandic króna and continued unrest among Iceland s main trading partners in the industry. An important factor is the depreciation of the pound sterling in the wake of the Brexit referendum. Iceland has substantial interests at stake in marine export products to the UK, the fishing industry s largest trading partner, which accounted for exports valued at ISK 40 bn in 2016. Furthermore, the effects of the Russian embargo and the capital controls in Nigeria can still be felt. Even though these factors have made a significant negative impact on fisheries operating results, profitability is still robust in the sector, at ISK 55 bn for the year. Fish catches have been relatively strong thus far in 2017, in spite of the fishermen s strike early in the year. We expect catch volumes to rise during the year, partly because of an increase in quotas for cod and other groundfish for the fishing year beginning on 1 September. Furthermore, fisheries authorisations to transfer their quotas between fishing seasons were doubled because of the aforementioned strike. Therefore, there is cause for optimism at present.

Íslandsbanki has issued fishing industry reports on a regular basis since 2003. We hope these reports give direct and indirect stakeholders a comprehensive view of the scope of the sector and its impact on Icelandic society. We also wish to enhance the general public s interest in the fishing sector and have endeavoured to make this report as clear and comprehensible as possible. The Bank benefited from the assistance of Deloitte in preparing the discussion of fishery operations, as it has in recent years. We extend our sincere thanks to Deloitte staff for their efforts. Runólfur Geir Benediktsson Executive Director, Seafood Industry Team runolfur.benediktsson@islandsbanki.is

Íslandsbanki and the Icelandic fishing industry Íslandsbanki offers comprehensive financial services to individuals, firms, and institutional investors. Within the Bank is a dedicated fishing industry team with years of experience in providing service to this core sector of the Icelandic economy. The Bank also maintains a fishing industry council composed of a broad group representing various departments and divisions within the Bank. The council s role is to share knowledge and discuss issues pertinent to the Icelandic fishing industry at any given time, with the aim of providing fishing companies the best banking service available in Iceland. Íslandsbanki is a proud partner of a large number of leading fishing companies in Iceland and abroad. According to Íslandsbanki s Q3/2017 financial statements, loans to the fishing industry accounted for the third-largest share of the Bank s corporate loan portfolio, at 19%. It is therefore obvious that the fishing industry is and always has been extremely important to Íslandsbanki. Figure 1. Distribution of ÍSB corporate loan portfolio by sector, Q3/2017 27% Real estate firms 25% Trade and services 19% Fishing industry 15% Industry and transport 14% Other Source: Íslandsbanki

Icelandic Seafood Market Report 2017 7 Asia the global leader in wild catch fishing Global wild catch totalled 84 m tonnes in 1990 and grew by 10% between 1990 and 2016. Examining fishing by continent shows that Asia is the leader and has been since 1990. Asia accounts for 55% of worldwide fishing, or 51 m tonnes, and has increased its share of the global total by 13 percentage points since 1990. Second in line are the Americas, with 18 m tonnes (19%), and third is Europe, with 14 m tonnes (15%). Asia has increased its share of global fishing, while the share of Europe and the Americas has declined. Since 1990, the Americas share has fallen by 9 percentage points, from 28% to 19%, and Europe s share has fallen by 8 percentage points, from 23% to 15%. Wild catch volumes contracted by 1% year-on-year among the world s 25 largest fishing countries, and catch volumes worldwide contracted by 0.7%. Table 1 lists the 25 largest fishing countries in the world. China is the largest, with 18 m tonnes, or 19% of the worldwide total. It is followed by Indonesia, the US, India, and Russia. In 2016, these five countries combined accounted for over 39 m tonnes, or 42% of the global total. In Peru, catch volumes contracted by 18%, mainly because of a downturn in anchovy fishing after a very strong 2015. Chile increased its catch by 14% YoY, bolstered by a good herring season and an uptick in the anchovy catch. Iceland ranked 19th worldwide in 2016, with a 1.2% share of total wild catch fishing. It has been moving down on the list in recent years, as other countries have stepped up their fishing more than Iceland has. Iceland s wild catch contracted by 19% YoY, as is discussed further in the section on the Icelandic fishing industry.

8 Icelandic Seafood Market Report 2017 Table 1. Leading fishing countries worldwide (thousands of tonnes) Ranking 2015 Country 2015 2016 % change Ranking 2015 Country 2015 2016 % change 1. China 17,591 17,704 1% 14. Korea 1,649 1,630-1% 2. Indonesia 6,485 6,515 0% 15. Bangladesh 1,624 1,644 1% 3. US 5,039 5,077 1% 16. Malaysia 1,492 1,509 1% 4. India 4,843 4,830 0% 17. Mexico 1,467 1,437-2% 5. Peru 4,824 3,956-18% 18. Morocco 1,365 *1,365 6. Russia 4,457 4,527 2% 19. Iceland 1,319 1,067-19% 7. Japan 3,460 3,400-2% 20. Taiwan 988 *988 8. Vietnam 2,757 2,796 1% 21. Spain 973 *973 9. Norway 2,294 2,289 0% 22. Denmark 869 *869 10. Philippines 2,152 2,097-3% 23. Canada 851 852 0% 11. Myanmar 1,954 *1,954 24. Argentina 814 808-1% 12. Chile 1,787 2,029 14% 25. Nigeria 710 700-1% 13. Thailand 1,693 1,678-1% 2015 2016 % change Total, largest countries 73,457 72,692-1% Global total 92,630 92,016-1% % of total 79% 79% *Figures from 2015 Source: FAO and OECD

Icelandic Seafood Market Report 2017 Figure 2. Leading fishing countries worldwide (thousands of tonnes) ICELAND RUSSIA NORWAY DENMARK CANADA US SPAIN MOROCCO ATLANTIC OCEAN Total landings 22.6 m MT, 28% of total marine landings MEXICO CHINA INDIA BANGLADESH NIGERIA MYANMAR INDONESIA PERU PACIFIC OCEAN Total landings 48.5 m MT, CHILE 59% of total marine landings JAPAN KOREA TAIWAN THAILAND VIETNAM PHILIPPINES MALAYSIA INDIAN OCEAN Total landings 11.1 m MT, 13% of total marine landings ARGENTINA <2.5 m tonnes -2,5 m.tonn 2.5-5 m tonnes 2,5-5 m.tonn 5-10 m.tonn 5-10 m tonnes 10 m.tonn + 10 m tonnes + SOURCE: FAO 9

10 Icelandic Seafood Market Report 2017 The Icelandic fishing industry Capelin catch doubles between 2016 and 2017 The outlook for 2017 is for an increase in catches in Iceland. Iceland s total catch over the first nine months of 2017 was 915,000 tonnes, about 64,000 tonnes (7%) more than over the same period in 2016. The YoY rise is due mainly to an increase in the capelin catch, which doubled between the first nine months of 2016 and the same period in 2017. Among key groundfish species, catches declined in the first nine months of the year, however. The total groundfish catch volume was down 27,000 tonnes, or 10%, from the same period in 2016, mainly because of the fishermen s strike at the beginning of the year. As is stated above, catches contracted in H1/2016, but we expect marine product exports to rally in the second half of the year, not least because of an increased cod quota. We expect this to mitigate the negative impact of a poor capelin season, and we estimate that exports will contract by only 1% in 2017. This development will remain an important factor in the fishing industry, and we anticipate an increase of just over 4% in marine product exports in 2018, followed by an increase of just over 3% in 2019. It should be noted, however, that since we published our forecast, the Marine Research Institute (MRI) has indicated that the 2017 capelin quota could turn out much smaller than we have assumed. Figure 3. Key species catches, first nine months of the year (thousands of tonnes)

Icelandic Seafood Market Report 2017 11 Catches and catch values Cod fishing generates increased catch value The total catch in 2016 was 1,067,000 tonnes, an increase of 19.1% (252,000 tonnes) over and above 2015. 2016 was affected by the failure of the capelin catch, which contracted by 73% (246,000 tonnes) YoY. In comparison, the capelin catch rose 218% (229,000 tonnes) between 2014 and 2015, to 337,000 tonnes in 2015. This steep decline in the capelin catch is the main reason for the nearly 20% contraction between years. As before, cod is the most-caught groundfish species, followed by perch, saithe, and haddock. Catch volumes for these species increased by 25,000 tonnes, or 6.4%, between years. For all of the above-mentioned groundfish species except haddock, catches were larger in 2016 than in 2015. The same cannot be said for pelagics, however, where catches declined for all major species except mackerel, which was broadly unchanged between years. Figure 4. Catches, key species (thousands of tonnes) 600 500 400 300 200 100 0 Pelagic 8% 9% 3% -6% -73% -13% 1% -4% Cod Perch Saithe Haddock Capelin Blue whiting Mackerel Herring 2011 2012 2013 2014 2015 2016 Change 2016-2017 Source: Statistics Iceland

12 Icelandic Seafood Market Report 2017 Contraction in export values and volumes Nearly 580,000 tonnes of marine products were exported in 2016, some 8.2% less than in 2015 and about 128,000 tonnes below the long-term average. The YoY contraction in exports is due mainly to reduced catches, as wild catch declined by 19% during the year. Year-2016 export values totalled about ISK 232 bn, nearly ISK 37 bn (14%) less than in 2015, at 2016 prices. Export values per tonne have therefore shrunk between years, owing mainly to the steep appreciation of the króna in 2016. Cod leads exports in volume and value Examining fish exports by species reveals that cod was the mostexported species in 2016 the second time since 2010 that exports have been led by groundfish (cod in both instances). Cod exports grew by roughly 14,000 tonnes (11.6%) YoY, to the 2016 total of 136,000 tonnes. Mackerel was Iceland s second-largest exported species in volume terms, with nearly 68,000 tonnes exported in 2016, a decrease of just over 18,000 tonnes (20.1%) from the prior year. The Russian trade embargo caused a contraction in exports of mackerel and herring, both of which were exported to Russia in large quantities in 2014. Mackerel exports contracted by nearly 45,000 tonnes in 2015, while the volume exported to Russia contracted by 28,000 tonnes, or 64%. Herring exports declined by nearly 35,000 tonnes (38%) in 2015, including a contraction of 28,000 tonnes (80% of the total reduction) in exports to Russia. On the other hand, herring exports have declined markedly in the past five years, or by over 103,000 tonnes. As before, cod was the most valuable export species in 2016. The export value of cod during the year was ISK 100 bn, about 43% of Iceland s total marine product exports. It has been on the rise in recent years but shrank YoY by nearly ISK 2 bn, or 1.8%, at constant prices. Other groundfish export values declined as well over the same period, in spite of an increase in export volumes, owing to the appreciation of the króna in 2016. Ranking second in export volume in 2016 was capelin, at ISK 18 bn; therefore, it is clear that cod is the runaway leader in terms of export values.

Icelandic Seafood Market Report 2017 13 Figure 5. Export value, key species (ISK bn at 2016 pricess) 120 100 80 60 40 20 0 Cod Perch Saithe HaddockH alibut Capelin Mackerel Herring Blue whiting Shrimp Pelagic 2010 2011 2012 2013 2014 2015 2016 Source: Statistics Iceland

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Icelandic Seafood Market Report 2017 15 UK the leading market for export values Figure 31 lists the top 15 marine product export markets, which accounted for about 87% of total marine export values in 2016. The UK was Iceland s largest trading partner during the year, buying marine products for a total of ISK 40 bn, or 17% of all marine exports. Next was France, with ISK 27 bn (12%), followed by Spain (10%), the US (8%), and Norway (7%). These five largest trading partners accounted for 54% of total export values for the year. Norway stands out among them, in that little cod or other groundfish is exported there, whereas some 70% of the total Figure 6. Export value by country, key species, (ISK bn) value of exported cod is sold to the UK, Spain, France, and the US. Norway also stands out in that it accounts for the largest share of exported capelin value. Examining marine product exports by country reveals that Norway is the leading market, with 80,500 tonnes, or 14% of all marine exports. Norway buys the most pelagic fish and fishmeal, followed by the UK, Denmark, Spain, and France. These countries account for about 46% of total marine exports, or 266,000 tonnes, Other marine products include frozen fish by-products used for meal, mainly frozen waste not suitable for human consumption. Figure 7. Export volumes by country, key species (thousands of tonnes) 50 45 40 35 30 25 20 15 10 5 0 UK France Spain US Norway Germany Netherlands Portugal Pelagic Other marine products China Blegium Denmark Nigeria Russia Poland Canada Source: Statistics Iceland 120 100 80 60 40 20 Norway UK Denmark Spain France China Holland Netherlands US Portugal Pelagic Other marine products Faeroe Islands Japan Nigeria Ukraine Poland Source: Statistics Iceland

16 Icelandic Seafood Market Report 2017 Table 2. Export value, by trading partner and species (ISK m) Cod Capelin Perch Haddock Shrimp Saithe Herring Halibut Blue whiting Other Total % of total UK 28,832 1,497 2,273 6,837 450 39,888 17% 307 25 463 6,070 48,353 18% France 25,502 636 308 253 72 26,770 12% 4 18 122 2,607 23,268 9% Spain 21,339 437 2 1,527 494 23,799 10% 19 215 300 2,608 23,255 9% US 16,404 766 1,286 22 239 18,718 8% 3,030-4,280 5,960 20,168 8% Norway 2,992 2 11,201 55 2,190 16,439 7% - 15-2,492 18,345 7% Germany 11,284 323 256 35 18 11,916 5% 290 216 1,775 2,122 16,537 6% Netherlands 6,188 435 3,886 1,078 136 11,722 5% - - 184 3,398 13,730 5% Portugal 8,169-550 - 210 8,929 4% 345 239-1,397 11,370 4% China 3,247 1,810 3,116 627 57 8,858 4% 2,434 - - 254 10,319 4% Japan 1,511 2,172 3,297 3 1,590 8,574 4% 103 2,827-1,858 9,157 3% Belgium 7,263 204 7 72 128 7,675 3% 946 1 168 1,424 8,755 3% Denmark 1,200 189 1,727 1,695 980 5,791 2% - 1-1,085 7,983 3% Nigeria 4,215-145 - 968 5,328 2% - - - 165 7,872 3% Poland 611 64 2,941-5 3,620 2% 107 1,602-1,182 7,629 3% Canada 1,569 301 421 311 509 3,111 1% - 2,934-98 3,088 1% Other 12,398 4,539 12,986 413 764 31,101 13% 2,945 1,705 91 5,067 34,764 13% Total 152,724 13,374 44,404 12,927 8,809 232,238 100% 10,529 9,798 7,383 37,786 264,593 100% Source: Statistics Iceland

Icelandic Seafood Market Report 2017 17 Aquaculture in Iceland Arctic charr the largest farmed species Iceland s aquaculture companies produced a record-breaking 15,201 tonnes of fish in 2016, only 100 tonnes below the 2015 forecast prepared by the Icelandic Aquaculture Association. The previous record, 9,930 tonnes, was set in 2006. Salmon was the leading aquaculture species in Iceland, with 8,420 tonnes, an increase of 5,160 tonnes YoY. About 4,084 tonnes of Arctic charr were farmed, or 147 tonnes more than in the prior year. In addition, 2,138 tonnes of rainbow trout and 59 tonnes of cod were farmed. Farmed fish production is expected to total 20,801 tonnes this year and 30,475 tonnes in 2018. Figure 8. Farmed fish harvest: whole, ungutted fish (thousands of tonnes) 18.5 15.2 9.9 5.6 5.0 5.1 5.0 5.3 7.4 6.9 8.3 8.3 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* Salmon Charr Rainbow trout Senegalese sole Cod Source: Icelandic Aquaculture Association

18 Icelandic Seafood Market Report 2017 Figure 9. Operating permits for aquaculture and protected areas of salmonids at sea Hraunhafnartangi Geirólfsnúpur Siglunes Tjörnestá Fontur Látrabjarg Glettinganes Hellissandur Malarrif Sources: Directorate of Fisheries, Institute of Freshwater Fisheries. Permits for 50-250 tonnes per year Permits for 250-1000 tonnes per year Permits for 1000+ tonnes per year Protected areas at sea where the farming of salmonids of reared origin in sea cages is prohibited

Icelandic Seafood Market Report 2017 19 Export value of farmed fish increases The export value of farmed fish was about ISK 9,618 m in 2016, as opposed to ISK 7,144 m in 2015, at constant prices. The value of salmon was ISK 5,569 m in 2016, an increase of ISK 2,247 m from the prior year. The value of trout (Arctic charr and rainbow trout) was ISK 3,562 m in 2016, an increase of ISK 57 m YoY. Figure 10. Export value of farmed fish, constant prices (ISK bn) 9.6 7.1 5.1 5.1 5.6 2.7 3.2 1.8 2.6 3.4 3.3 3.8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Salmon Trout Cod Source: Statistics Iceland

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Icelandic Seafood Market Report 2017 21 The majority of farmed fish export value is sold to the US As before, the US was the largest market for Icelandic aquaculture products, with about 25% of total value in 2016, down from 35% in 2014. Exports of farmed fish to the US in 2016 were distributed more or less evenly between salmon and trout, in terms of both volume and value. Germany receives about 17% of export value, followed by the UK, with 13%. Exports to Germany included only salmon (69%) and trout (31%). About 98% of the export value of farmed fish sold to the Figure 11. Year-2016 export value of farmed fish, by country 24.6% US Germany 6.9% 6.5% Faeroe Islands 17.2% 13.2% 8.0% France UK Norway Denmark 4.8% 18.8% Other Source: Statistics Iceland

22 Icelandic Seafood Market Report 2017 Disclaimer - This report was produced by Íslandsbanki hf. The information in this report is based on publicly available data and information from various sources deemed to be reliable. The information has not been independently verified by Islandsbanki hf. ( Islandsbanki ) and Islandsbanki does not guarantee that the information is comprehensive or accurate. All views expressed herein are those of the author(s) at the time of writing and may change without notice. Islandsbanki holds no obligation to update, modify or amend this report or to otherwise notify readers or recipients of this report in the event that any matter contained herein changes or subsequently becomes inaccurate. This report is informative in nature and should not be interpreted as a recommendation to take, or not to take, any particular investment action. This report does not represent an offer or a solicitation to buy, sell or subscribe to any particular financial instruments. Islandsbanki accepts no liability for any potential losses or other consequences arising from decisions based on information in this report. Any loss arising from the use of the information in this report shall be the sole and exclusive responsibility of the investor. Before making an investment decision, it is important to seek expert advice and to become familiar with the investment market and different investment alternatives. Various financial risks are at all times present during investment activities, such as the risk of no yield or the risk of losing the capital invested. International investments include risks related to political and economic uncertainties as well as currency risk. Each investor s investment objectives and financial situation is different. Past performance does not indicate or guarantee the future performance of an investment. Reports and other information received from Islandsbanki are intended for private use only. This material may not be copied, quoted or distributed, in whole or in part, without the prior written consent of Islandsbanki. This report is a brief summary and does not purport to contain all available information on the subject covered herein. Regulator: The Financial Supervision Authority of Iceland (www. fme.is)

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Icelandic Seafood Market Report Íslandsbanki Norðurturn, Hagasmári 3 201 Kópavogur, Iceland Tel.: +354 440 4000 For more information, please visit our website: www.islandsbanki.is/seafood seafood@islandsbanki.is