China economic slowdown keeps seafood sector guessing : September 8, 2015
Ross Davies – UNDERCURRENT NEWS
In line with the boom experienced by its economy in the last decade, China’s seafood industry saw much growth and diversification.
China’s sector was based around cheap processing and aquaculture production for exporting, of species such as shrimp and tilapia. Imports and farming for domestic consumption have since risen to the fore, bolstered by the emergence of middle-class consumers.
And, just as China’s taste for imported seafood has developed, so have its exports, with freshwater products – principally tilapia – sold on a global scale. Also, although the sector for importing, processing and re-exporting of frozen whitefish from Europe and North America, based largely in Qingdao and Dalian, is under pressure, it’s still a vital part of the seafood sector supply chain.
So, with reports of a faltering Chinese economy and a crash in the stock market, what can the seafood industry, both at home and abroad, expect?
It’s a question that doesn’t seem set to receive any concrete answer soon. Conjecture has been at fever pitch since the Bank of China surprised markets by devaluing the RMB by 2% at the end of August.
The move has sent shockwaves across some of China’s neighbors in the Asia region. The Korean won has since slumped to a four-year-low, while the Vietnamese dong followed suit by dropping by 2%.
As Jason Carter, co-founder of Elite Seafood – a Chinese tilapia farmer and producer – told Undercurrent News, it’s a “wait-and-see situation”.
“It’s hard to say how long this situation is going to last for,” said Carter. “We are normally used to seeing the RMB strengthening – not the other way around.”
What most industry insiders seem to be in agreement over is that recent developments will drive down Chinese export prices – particularly of volume products, such as tilapia, pollock and cod.
Supplying cheaper products to the overseas market could carry several benefits, and has been advocated by the International Monetary Fund.
“If the RMB keeps dropping, China will become more competitive on its exports of tilapia and shrimp, compared to its neighbors, such as Vietnam,” said Frank Bodin, CEO of the US-based Hadley Company, which processes and buys cod, pollock and haddock from China.
Frank Zhou, president of Qingdao-headquartered salmon processor Ocean One Enterprise, agreed that a devalued RMB “will help our export business” but voiced concerns that it would be to the severe detriment of imports. Ocean One’s business model is based on imports of wild salmon from Russia and the US, which is then re-exported to the US and Europe.
“There is a fear that the RMB will be further depreciated, meaning many people will choose to change RMB to USD and move their money outside the country,” Zhou told Undercurrent. “This is not good for imports, as imported products will become more expensive in China.”
Another concern for processors is that life will be made considerably tougher as a result of buying raw materials in USD.
“Because fish processing is based on an import-export model, paying in USD to buy raw materials is a problem, and is likely to become more and more serious,” said one senior executive from a Chinese processor group.
Worries have also been mounting among Chinese processors over the future availability of financing. While the government has undertaken several quantitative easing strategies and stimulus packages over the last year – including reducing the reserve requirements in banks – the current economic climate means companies are less likely to be able to access loans.
“So far, the trickle-down effect of these stimulus measures has been very slow,” said Bodin.
According to Zhou, rising labor costs in labor-intensive industries – such as seafood processing – have also made lenders more wary.
“Banks are cutting credit lines for seafood processing companies,” he said. “This has already caused the bankruptcy of many Chinese processors, while several Qingao and Dalian processors have had to close their plants. Many big players have disappeared. Change is needed.”
In his latest Ken’s Catch newsletter, US seafood broker and consultant Ken Salzinger also argued that the stock market crash was already in danger of a fomenting a downturn in exports to China. Salzinger highlighted Ecuadorian shrimp as a product that has become very reliant on China.
“Ecuador, which has been flying high on the tail of China’s kite, may soon lose their number one market,” wrote Salzinger. “Although I don’t see the Chinese abstaining totally from eating shrimp, their purchasing may shift which will create a vacuum for Ecuador.”
“At the same time, both Canada and the US have been ecstatic with China’s seafood purchases, mostly lobsters. However, can this trend be sustained? I think not. When China sneezes, the rest of the world holds its breath and hopes the cold is not contagious,” he said.
As referenced by Salzinger, Ecuadorian farmers, in particular, are likely to be watching on with some consternation, given China’s role as a premium shrimp export destination. In 2014, China imported 14,859 metric tons, up 79.34% year on year.
In addition, Ecuador sold 74,081t to Vietnam in 2014, up 97.17% y-o-y. Although some of this shrimp used by Vietnamese processors for re-exported, a substantial amount is shipped to the port of Haiphong and smuggled across the border into China, to avoid paying import duties. This trade is being cracked down on in 2015, but is still continuing.
To lose such a guaranteed business channel would be nothing short of damaging.
Sandro Coglitore, general manager of Omarsa, one of Ecuador’s largest shrimp exporters, said he has not seen the impact of the China economic situation.
There is still “huge demand” in China and prices keep going up. “In all markets now, even the US.,” he told Undercurrent.
Adriaan de Leeuw, the co-founder of Belgium-based importer Solea International, said he has been hoping the situation with China would see prices soften.
“I’ve been hoping for six weeks, but until now the only way the prices are going is up,” he said.
Clearwater on China
Canada’s shellfish harvesting company Clearwater Seafoods is also bullish on China.
Clearwater, which sells clams, coldwater shrimp, lobster, turbot and scallops to China, reported sales for its recent Q2 of CAD 15.9 million, up 28.5% y-o-y.
The driver, according to the company, was strong market demand that increased sales prices and volumes for turbot and shrimp. Higher sales prices for lobster and higher average foreign exchange rates also contributed to the increase in sales.
For the first half, Clearwater’s sales to China were CAD 28.4m, up 32.8% y-o-y.
“The company remains bullish on the China market potential for our products,” a spokesman for Clearwater told Undercurrent. “China is the world’s second largest economy and the demand for our premium, wild-caught and sustainably-harvested Canadian seafood remains strong. We expect this trend to continue into the foreseeable future.”
Likewise, Peter Redmayne, president and founder of the Sea Fare Group, which organizes the China Fisheries & Seafood Expo, now the sector’s second largest trade fair behind the Brussels show, refused to be drawn into any doom-saying. He cited the ongoing healthy economic performance of China’s urban centres – and the fact that China’s listed seafood companies’ stocks are relatively unchanged to what they were a year ago – as evidence that a crisis point is far from imminent.
“The economy in the big cities like Beijing and Shanghai is still strong, albeit not growing at the frothy pace of the past decade or so,” said Redmayne.”It’s in the industrial cities, which now have too much capacity in their cement and steel sectors that things are hurting. Since most imported seafood is consumed in the big cities, which are not hurting, I don’t see any change.”
China’s two main stock exchanges, the Shenzhen Stock Exchange and the Shanghai Stock Exchange, are down dramatically from peaking in June.
“The stock market collapse may have some impact, but keep in mind that even though stocks have plummeted in the past few weeks they are still at the levels of about a year ago when stock prices headed into the stratosphere. Bottom line is there are plenty of people in China who want to consume imported seafood and that number is only going to increase in the future,” he said.
“The rapid correction of shares appears to be more sentiment-driven rather than driven by fundamentals,” agreed Jim Gulkin, managing director at Siam Canadian. “Therefore we are not expecting this to be an ongoing situation and positive reversal of stock prices could happen at any time.”