Outlook for the2004 fishmeal and fish oil markets

On May 12 and 13, Iffo's Commercial Committee met in Miami to analyse the present market situation for fishmeal and fish oil and to develop an outlook for the full year 2004. Following the meeting J. C. Bololanik (JCB), Executive Advisor of IFFO answered some questions on fishmeal supply and demand.
May 18, 2004

On May 12 and 13, Iffo's Commercial Committee met in Miami to analyse the present market situation for fishmeal and fish oil and to develop an outlook for the full year 2004. Following the meeting J. C. Bololanik (JCB), Executive Advisor of IFFO answers some questions on fishmeal supply and demand.

We hear that production is running rather well especially in Peru where unsold stocks are reported to build up quickly. What are your comments ?

JCB: I wish you were right. It would mean that production is back to normal, which is what our Industry badly needs. Unfortunately the situation you describe is just a mere facade. You are most probably confused because the most important producers are enjoying the peak of their fishing season. But, as you know, fishing is regulated everywhere directly or indirectly through a quota system and weekly variations in the catch do not change the overall supply picture for 2004.

As a matter of fact the fishmeal production of the five major players will hardly exceed 3 million tonnes, somewhat better than the lousy 2003 result but still 500,000 tonnes less than the average of the past five years. In other words the supply will not balance the demand.

Let us go deeper into the analysis in order to give you a very detailed picture.

• In Chile no change is expected in the South (450,000 T) whereas Chile North should come back to a more reasonable level (300,000 T) after a most disappointing 2003.

• In Scandinavia it is very doubtful that Denmark will reach its target of 280,000 T production in 2004 considering the most disappointing sand eel fishing season.

• In Iceland the very short capelin winter season means already a sharp drop in the estimated production (200,000 T versus 280 000 T in 2003).

• Only Norway, which is fishing freely the healthy blue whiting stock, is more or less in line with 2003 ( 200,000 T)

• For Peru the estimated production for this year is 1.6/1.7 million tonnes, better than the catastrophic 2003 but still below the average of the past five years.

This is the most likely scenario productionwise for 2004

Yes, but even if transient, the current high production weighs on the market and is inevitably a factor of weakness ? What can you say in that respect ?

JCB: Here again let us not jump to conclusions and let us analyze the situation in depth. What are the facts :

• there are very limited unsold stocks. Denmark is even heavily oversold today. Of course everybody is looking at Peru. To be very clear and transparent, we estimate today the unsold stock in Peru at 150,000 T. It is not big news as it is always more or less the same every year. It might even double in the weeks to come but it will not change the overall supply picture

• the only new parameter this year is the reduced availability of freight worldwide and especially in the South Pacific. It will affect the speed of the deliveries but not the deliveries as such. In other words we expect a slower flow of goods into the export market

• we know that consumption is down in Europe. It is not a matter of prices, which remained remarkably stable in Euro terms, but a matter of legislation. In that respect it would appear that the lifting of the ban on fishmeal in ruminants diets might occur in January 2005

• in fact China is and will again be the decisive factor. We estimate (summing up the current stocks in China + the fishmeal afloat + the meal to be shipped) that the availability there is more or less 170,000 tonnes. This will at best cover the consumption of May/June. As a consequence we expect China to be back in the market within no more than a couple of weeks to cover its consumption July onwards, especially in the healthy aqua sector

So, we are confident that the market will stay at the current level. To tell you the truth, if we would not face the freight issue, I would even consider a price increase.

But it is also a fact that some players are talking the market down and exerting a strong pressure on financially weak producers. As a consequence are you not too optimistic?

JCB: I don’t think so. I am just trying to be realistic and pragmatic. Our analysis is objective and transparent. I know that some in the Trade (the same as always) will say : again a bullish outlook ! In fact they tend to forget very quickly. We have been facing the same situation three, two or a year ago and our conclusions proved to be correct. Why should it be different today ?

As I already mentioned the freight issue is a matter of concern and logically some traders will try and use it as a tool in their negotiations. But in the end goods will move into consumption. Anyway we will have to face the problem for the years to come.

Furthermore the interests are different within the Trade.

In Europe we experience a hand to mouth approach, with importers selling slowly their stocks into a quieter market. They logically try to bring the market down to $530 FAS levels basis FAQ Peru.

To the contrary, in the Far east most of the Traders have positions at the current levels or higher and their priority is obviously not to push the market down. They look for levels of $550/560 FAS, more in line with the potential supply and not too far from producers’ ideas.

The South American producers consider that a level of $570 FAS for FAQ meal is very competitive and can easily be paid by the market. The strong European and Japanese currencies back such position as well as the exceptionally low FM/SBM ratio currently under 2 whereas we have been working with a ratio next to 3 during the past 2 years.

In addition two main reasons explain the recent aggressive marketing policy of Scandinavia :

- a slow market

- but also, more fundamentally, the fact that 70 % of the production takes place during the first semester against 60/70 % of the consumption in the second semester.

The selling pressure is now over in Scandinavia as the fishing season comes to an end. A firmer market is expected for the second semester.

In the US we are at the start of the season and all the production (meal and oil) is already committed !

At last the home consumption in the producing countries is in line with our expectations. Chile’s salmon industry will again grow by 10 % this year and will import 40 000 T of special meals to balance its diets. It is a healthy market for the next 5 years. The Norwegian Industry is also in a good shape overall and will maintain the past year production level.

If you put all that into a basket, the outlook can but be stability to firmness.

I would just like to add that the Peruvian producers have learnt the game. They know how to manage a transitory period. Of course we cannot ignore that some isolated smaller producers might not stand the financial pressure, but it will not make the market, all the more that the banks also learnt where their interests lie and how to better protect them.

You did not mention fishoil . . .

JCB: No. Because there is very little to say. The bulk of the potential production is already committed. We might experience some tensions in the execution of the contracts because :

• in Peru the average oil content of the fish is nearer to 3% than to 5%

• in the US current oil content is 8% as compared with a normal 12/13%

The prices quoted recently on a basis FOB Peru were $570. Considering availability, demand and competition, prices should be much higher. In fact fishoil prices are very cheap but the existing logistical constraints explain this level.

Thank you for that open exchange. We hope to meet you again in Buenos Aires.

JCB: We will see. By the way I seize the opportunity to inform you that I decided to leave IFFO. In that context just allow me one word and to mention for the last time FEO and its founders. I have enjoyed over more than 30 years the friendship and the confidence of the great figures who built our Industry. It has been a privilege. I have never and will never forget Jacques Schwarz, Carl Arnesen, Abe Shapiro, Lucho Banchero, Carlos Del Rio and many others. I do regret every day not to be in closer contact with Felipe Zaldivar, Tonio Tocornal, Carlos Sotomayor and again many others.

We have met over the years challenges of another magnitude than the ones we face today. The spirit of association always prevailed. Members always understood the importance to stick together and support each other. The ones always bridged the temporary weakness of the others. The differences of opinion or strategies were always discussed in an open forum. All this in a context of vision, ambition and inspiration. Nothing was ever taken for granted. We always chose the movement against conservatisms of any kind. This is what I wanted to state very briefly.