Buying into the potential of bass, bream
By Jason Holland, SeafoodSource contributing editor reporting from London
07 January, 2011
Generally speaking, the Mediterranean’s sea bass- and sea bream-farming industry was a lame duck throughout much of the so-called “noughties,” operating in a commercial environment dictated to by depressed demand and regular price slumps.
Many producers closed last decade, and some of the more pessimistic industry observers suggested that the industry would collapse, especially once the true magnitude of Greece’s economic frailty was made apparent.
Thankfully, but quite unexpectedly, last year brought with it new hope for producers. Perhaps as a result of the record high salmon prices that prevailed in European markets throughout 2010, bass and bream enjoyed something of a renaissance — demand grew, triggering higher farm gate prices.
These circumstances have led to Mediterranean fish-farming operations again becoming an attractive proposition for outside investors. For example, Dutch private equity fund Linnaeus Capital Partners BV has been particularly active in Greece, buying into and increasing stakes in large companies such as Dias Aquaculture, Nireus and Selonda.
Turkey was the focus coming into 2011 with NBK Capital, a subsidiary of the National Bank of Kuwait (NBK), buying a 20 percent stake in Kilic Deniz, the country’s largest aquaculture company.
Another major reason these companies and other producers are appealing to outside investors is their current share prices, which took a big hit in 2008 and have never really recovered. The share prices for both Nireus and Selonda exceeded EUR 4 (USD 5.20) in 2007, but now they are less than EUR 1 (USD 1.30). Dias was faring better but was still well under EUR 2 (USD 2.60).
Gorjan Nikolik, senior associate for commodities, farming and animal protein with Rabobank International, told SeafoodSource that it’s key to note the most important factor in this industry has been the volatility of production volume. All other factors are secondary in terms of their impact on prices and influence on company performance, he said.
Nikolik explained the industry was rocked by volume over-production in 2008 that far outstripped demand and brought prices tumbling down. The following year, despite volumes that were more in line with market demand, all producers were confronted by an adverse macro-economic situation. Between 80 and 90 percent of these fish are traditionally sold to Italy, Spain and Greece. But, because of the harsh economic climate that prevailed at the time, these three markets contracted between 7 and 8 percent in 2009, he said.
“Today, the investor community really needs to be convinced that this industry can manage the volume and create the demand for the volume that it can produce,” said Nikolik. “That’s the long-term question — can the sea bass and sea bream industry create demand for itself? The aquaculture industry can produce a lot of fish. We know that from what happened in 2008 and we can draw parallels with the salmon industry. But the real challenge is to develop the market.”
A particular problem for producers of bass and bream is that their flagship product is still whole fish. With whole fish products there are just a few options that might facilitate expansion — producers can try and win over new consumers, and markets such as Russia are frequently touted. Alternatively, they can change their product and manufacture fillets, for example.
“They really need to focus more on long-term product and market development rather than on production,” said Nikolik.
While there are no final figures currently available, the total Mediterranean bass and bream production was expected to have decreased in 2010, and it’s likely it will drop slightly further in 2011, which should keep prices in check.
There are other factors working against the industry, such as increasing fishmeal and fish oil prices. But perhaps more far reaching is the trend in Europe that more products are being sold from the shelf and fewer from fish counters.
Without doubt, wet fish counters are ideal points of sale for visually attractive products like whole sea bass and sea bream, but once they are sold in stores as fillets they are competing with fish like cod, Alaska pollock and even pangasius.
This again raises the market development conundrum that Nikolik said the industry faces — producers have attractive, tasty fish, but they must come up with a product that consumers want to buy. The Rabobank analyst suggested this is another reason for the depressed share prices and therefore another motivation for outside investment.
Further motivation for investors is the widely-held belief that this is an industry that would greatly benefit from consolidation, he said.
“Not only would there be more control over volume, but also the synergies — particularly marketing and product development — that larger groups of companies could introduce would be much more effective. You can’t do that if you are a small, lone operator, you need big healthy companies,” explained Nikolik.
“The industry as a whole would benefit from consolidation, but the question is which individual companies and owners will benefit and which ones will miss out?” he added. “It is not hard to imagine that if one was to buy stocks and successfully integrate the top three or four producing companies then two, three years from now a big, strong company would be a lot more valuable, provided antitrust legislation would allow it.”
It’s highly likely this is the bigger picture scenario that the Dutch, Kuwaiti and other investors have in mind, which is why this will be an exciting industry to follow throughout 2011.
All Commentary >
07 January, 2011