Seafood isn’t steel: China’s huge USD 11 trillion economy is more a series of sub-economies. While the economy is currently being held back by outmoded, over-capacity industries like construction and steelmaking, there is a much brighter outlook for industries like seafood given China’s consumers can increasingly afford and want to consume quality, safe seafood. Yes, there is much over-capacity in the export-focused seafood processing sector in China but growth outlooks are good for anyone selling species like crab and shrimp to the growing middle classes.
China’s ‘old’ economy to cause further deflation, lower prices: with industrial input costs down and prices being lowered on everything from real estate to steel to cars, it’s hard to see any prospect for serious price growth for any commodity, including seafood. Banqueting and corporate entertainment spending by real estate companies and state owned construction and energy companies will be tame in 2016.
Wage costs static but consumer sentiment to take a hit. Over 15 million construction workers lost their jobs in 2015 according to government, which usually posts optimistic data on employment levels. China isn’t going back to the massive infrastructure boom that fuelled much of the growth in the decade up to and through the financial crisis. This means more workers and lower pressure on wage demands for seafood companies but this also threatens consumer confidence at the blue collar end of society which could in turn hurt consumption of seafood species like shrimp which a whole class of Chinese consumer became able to afford in the past decade.
Will China let the RMB depreciate further? There is much expectation and speculation that China’s Renminbi is going to slide against the dollar in the coming year. There is much pressure on the Chinese currency in the wake of the Fed’s upward revision of interest rates which prompted an exit from China of much of the speculatory funds which had poured into the country in search of higher returns. A weaker RMB would be a boost to exporters of seafood who have cited the currency’s strength as a dampener on shipments. With China in recent months cutting interest rates to boost its economy it appears that depreciation of the RMB (which went from 6.2 to the dollar in January to 6.5 in December) will continue to weaken though given exports contribute only 2.3 percent to China’s GDP it’s important not to over-estimate the importance of the export sector in influencing government decisions.
Listed Chinese seafood companies to struggle while China’s stock market looks set for a volatile 2016. After slipping 7 percent on opening trading day of the year, there remains much nervousness about the stock markets where big names like Baiyang, Guolian and Zhangzidao are listed. Unfortunately China’s stock market at a broader level remains undermined by a lack of professionalism in the investor side and continuing problems with insider trading among some of the largest listed state owned firms – which are effectively run by the same entity as the regulator. This will likely remain the case until the state enterprises which dominate the exchanges are properly privatised and that’s a very long way off. In the meantime serious investors are likely to be turned off the market, particularly given clumsy recent efforts by government to prop up and clean up the market. With so much uncertainty it’s hard to see how China’s seafood companies can raise large amounts of cash from the markets to pay for financing or expansion.
Chinese investors will hunt for overseas companies: with weaker yields at home Chinese corporations are going to accelerate their purchases and investments overseas. Amazingly, Chinese spending on overseas M&A totalled USD 61 billion last year, up 16 percent year-on-year and will grow even further in 2016 as Chinese investors seek to hedge their bets. Given the country’s own food safety and branding weaknesses, proven foreign food processors and proven food brands have always been high on the list of desirable acquisitions for China’s firms, meaning overseas seafood firms with desirable assets or brands (particularly if they can be made to work in China) will be sought after by Chinese buyers.
China’s neighbour to cash in: Vietnam’s exports to China rose a remarkable 50 percent in the first half of 2015, a feat that’s partly related to Vietnam’s role as a neighbouring outsourcing backyard for China but also its role as a transit point for goods bound to China from further afield. Vietnam seems well poised given its wages are lower than China’s by a considerable margin while the country has favourable access to new markets through its membership of the Trans Pacific Partnership as well as favourable trading status allowing easier access to the EU market.
By contrast Indonesia and Malaysia are dependent on commodity – oil, coal - exports to China and have seen their economies slow sharply due to China’s weaker demand for raw materials and fuel the past two years. It’s highly likely however that these countries will seek to ramp up exports to China in other categories for which there is greater demand – such as seafood.
The end for zombie seafood processing companies? China’s government has vowed to remove excess industrial capacity in 2016 – this was the main takeaway from the recent meeting of the Central Economic Work Conference. This should mean radical restructuring of many industries kept alive on debt and assistance from local government. And this could spell the end for some seafood processors in a precarious financial state.
Anti-corruption crusade reaches fishing corporations. Some of the big beasts which dominate China’s fisheries sector look set to come under the radar of state auditors who are being dispatched to all state owned companies as part of the government’s continuing move against official corruption.
Argentina to get a free trade deal? A new pro-market government in Argentina is vowing to increase its agricultural commodities to China. This suits Beijing, which wants to increase its range of sources for key commodities including grains, oilseeds and seafood. Securing supplies and some control over pricing – as well as favourable terms for acquisitions of local producing companies or assets- are both motivating factors for China’s free trade deals (it has one with Chile while Ecuador has been seeking a deal) and Argentina looks like a Latin version of Australia in terms of the range of commodities it can offer.
