The weakest economic growth in a decade and a sluggish euro zone economy are both reasons for pessimism for China’s seafood producers and importers. One firm exporting from China, Siam Canadian, said its shipments in the first half of 2012 were down 20 percent in the same period last year due to weaker demand in its top markets: Canada, U.K., Mexico and the United States.
“Many processors say that they are losing money. However, their factory investment is huge, therefore, they are trying their best to scale down their production to minimize the loss,” said Landy Chow, Siam Canadian’s head of China operations. “They are struggling near the break-even point, but so far none of the major processors have closed. I heard one small factory closed recently in Zhanjiang [in southerly Guangzhou Province], however, the owner rented his production facility to others.”
Fish farmers are responding to weaker demand by stocking less fish and also by not feeding the fish. “Currently several of our business partners, who are owners of the factories, told me that the yield from whole fish to fillet is very low, because the fish is thin after starving,” said Chow.
“By taking these measures farmers are minimizing their cost. Most of the farmers are suffering a bit of a loss but still continue farming expecting to get a better price in the coming months.” Chow has heard some farmers are shifting to farm shrimp “but shrimp farming needs more investment and the risks are even higher.”
There is however more optimism in the official statistics. Data from the Ministry of Agriculture (CMA) in Beijing shows that China is moving up the value chain. While exports from January to May edged up 1.8 percent over the same period in 2011, the value of exports surged 12.6 percent to USD 10.4 billion.
China’s seafood output during that period totaled 18.9 million metric tons (MT), according to the CMA. Of that total figure, 13.5 million MT came from aquaculture compared to 5.39 million MT from wild product. China exported a total of 3.3 million MT from January to May.
China’s rise in aquaculture has been dizzying. The country grew its overall seafood exports from USD 3.6 billion in 2001 to USD 13.2 billion in 2010, according to the United Nation’s Food and Agriculture Organization (FAO), while second-placed Norway grew its exports from USD 3.5 billion to USD 8.8 billion in the same period. China increased its exports further to USD 17.1 billion in 2011. Volumes were helped by processing and re-export of imported seafood products. China produced almost 55 million MT of seafood products valued at USD 21.7 billion in 2011, compared to USD 17.2 billion in 2010, according to Cui He, secretary general, China Aquatic Products Processing Marketing Association (CAPPMA).
Weaker domestic demand, prices
Data for the first half of 2012 released by the CMA showed that average prices of 80 aquatic products grew 8.09 percent year-on-year in July but slipped 1.38 percent compared to June prices. Harvest of wild products rose 11.47 percent year-on-year, and down 1.11 percent month-on-month while prices for freshwater products rose 3.81 percent in 2011 and fell 1.72 percent in June. Farmed shellfish was down 6 percent while marine shellfish harvests rose 1.54 percent.
The figures could be explained by softening demand. “Business is up slightly on 2011 this year but nothing like the growth we saw in 2008 or 2010,” explained Ma He, manager of the Dalian Seafood restaurant, one of a chain of mid-priced outlets on Chaoyang Bei Lu at the southern end of the Sanlitun entertainment district in Beijing. He reported that prices of products, including mussels and trout, are down 20 percent this summer. “There’s less demand. People are not as free-spending because there’s uncertainty about the economic outlook going into the autumn and even into next year.”
Among the processors, Pacific Andes reported a 27 percent jump in revenue in the first half of 2012, with gross profit up 14.9 percent to HKD 1.2 billion (USD 154.8 million). The firm credited a 50 percent rise in sales volume of frozen fish by its supply chain management division in mainland China. However, Pacific Andes did also note “deterioration in the profitability” of the processing and distribution division, which accounted for 31.3 percent of total revenues in the period. The firm plans to continue its efforts to improve processing efficiency in the PRC [China]” while also planning to “launch new value-added and ready meal products.”
Listed on the Hong Kong exchange, Pacific Andes this year completed a CNY 100 million (USD 15.9 million) renovation of its largest factory in Qingdao. A high-tech, new production line at the plant, China’s largest fish filleting and processing factory, will see electronic grading and trimming equipment replace workers, allowing for increased output while controlling costs. The factory will also allow processing of a wider range of fish species popular in Western export markets, including haddock and hake.
Processors have also been squeezed on salmon product. An inability to predict or hedge market developments means Chinese seafood processors have also found themselves saddled with huge inventories of processed salmon, explained Peter Redmayne, president of Sea Fare Group, a seafood consulting firm. “When Chile returned to the export trade in late 2011, after being hampered by disease for several years, they pulled global salmon prices down and Chinese buyers didn’t see that coming,” explained Redmayne. Chinese processing firms, which had paid USD 2.05 per pound for Alaskan salmon have found themselves competing with Chilean fresh-farmed salmon sold for USD 1.50 per pound.
Fish farmers going out of business
With production remaining highly fragmented there is a chance that current economic difficulties in key export markets could prompt a consolidation of the aquaculture production side, particularly in tilapia. Fish farms in Hainan Province, China’s top tilapia producing region in volume terms, are faced with a difficult choice of exiting the sector, claims Han Han, program manager at the Chinese Tilapia Aquaculture Improvement Project (AIP) run by non-governmental organization Sustainable Fisheries Partnership (SFP).
“This year it is quite evident that the low market demand of tilapia in the United States has meant a low buying price at farms here, thus discouraging farmers to culture tilapia. According to hatcheries data, the sale of fingerlings and fry this year dropped significantly, in some cases, even one-third less than the previous year. Farmers have no interest in stocking since the low price of tilapia is not worth inputs on feeds and fingerlings.”
According to Han the situation has alarmed processors, feed mills and industry associations. “People in the sector are talking a lot more now about how to build up the brand and quality of Chinese tilapia. But it takes a long time for the industry to reach agreement internally. CAPPMA is trying to pull things together, but for some reason, they are not very efficient.” Her organization, says Han, hopes the current scenario may force the adoption of more sustainable practices “but, on the other hand, we are a bit worried if the pressure goes on, at some point the industry may collapse.”
China has lifted total aquatic production to almost 55 million MT in 2011, from 51 million tons in 2009, according to government figures. It’s hard to see how such growth can be sustained. Cui He, secretary general of CAPPMA, pointed to the pressures on the sector by industrial expansion, particularly of water-intensive industries like petrochemicals and paper manufacturing, both of which have an intensive presence in key aquaculture and processing provinces like Shandong, Zhejiang and Guangdong.
Total aquaculture production acreage will peak at 8 million hectares in 2012 and then slowly decline due to industrial competition for land and urbanization. The seriousness of the water quality situation is obvious to readers of Chinese newspapers, which on a daily basis run photos of fish kills due to pollution hitting both inland and coastal fish farming.
China’s seafood sector is highly fragmented but some leading large-scale players have emerged, among them fish farms such as the Dalian-based Homey Group and the Zhangzi Dao Fishery Group, both of which have been shifting from low-price exports.
Faced with tight export markets and falling prices, Homey and Zhangzi Dao have shifted to domestic markets and higher-margin products. A spokesman for Homey Group said the company was shifting its focus from cultivating shellfish to breeding sea cucumber, also known as beche-mere and fished in deep-water seas, for use in Chinese cooking and medicine. A 25 percent gross margin on sea cucumber compares favorably with shellfish, which yields less than 10 percent margins, said the spokesperson. Qi Lu Securities, which analyzes the market and prices of sea cucumber and shellfish, predicts that sea cucumber prices will rise from CNY 170 per kilogram (USD 27) average in the first half of 2012 to CNY 200 per kilogram (USD 32) in the latter half year of 2012. Zhangzi Dao claims it harvested 2,300 tons of sea cucumber worth CNY 500 million (USD 79) in 2011, a year-on-year rise of almost 70 percent. Meanwhile, Homey is investing heavily in marketing and also in extending the sea cucumber industry chain with a new seedling center and an 800-hectare farming project to raise production.
Imports hit
Seafood importers will struggle to grow 2011 numbers given a weaker economic outlook in China. Fan Xubing, head of Beijing-based Seabridge Co., a consultancy advising importers, says his clients are downbeat on China. “Both exports and imports are difficult so far this year because of the weak domestic economy,” says Fan. However he sees one cause for optimism: weather. “The conditions for aquaculture have been good so far because of the relatively stable weather and comparative lack of typhoons.”
The long-term potential is massive however, if China delivers on a long-advertised goal of shifting the economy from one reliant on massive investment in infrastructure and manufacturing to one driven by domestic consumption. Consumer spending continues to play a minor role in the state-controlled economy dominated by giant government-run enterprises.
Official figures show the share of consumption as a percentage of China’s GDP has decreased from 50 percent to below 35 percent over the past 15 years. Even though household consumption increased by more than 8 percent annually it hasn’t kept up with GDP growth, which has averaged 10 percent, according to Wang Tao, China economist at investment bank UBS. The state-controlled business sector has benefitted disproportionately from government subsidies and stimulus packages, at the expense of unleashing household spending through better social safety nets, she said.
Tapping domestic demand will clearly be important for China’s seafood producers and processors’ future growth. CAPPMA secretary general Cui expects a slight rise of about 2 percent in locally-produced seafood volume in 2012. That suggests China will remain a dominant player in volume terms, even as it copes with challenges and falling demand. However, long-term challenges of weak export markets suggest some of the local capacity will have to be diverted to domestic and Asian markets.
China also faces the prospect of competition from Vietnam, which has competed aggressively for China’s tilapia market in particular, offering a higher-yield basa (pangasius) alternative to international buyers. Nonetheless, experts believe China has the economies of scale to remain top dog. Head of the FAO’s Asia fisheries office, Simon Funge-Smith believes China can hold onto the huge lead in production built up over the years. “Chinese production is still huge,” said Funge-Smith. “This means any shift elsewhere is unlikely to significantly erode China’s dominant position as the world’s No. 1 producing country.”
