Supply chain to bear brunt of US tariffs on China, shrimp sector will be worst hit : July 26, 2018
Tom Seaman: UndercurrentNews
The Chinese shrimp sector is likely to be the most hit by the 10% tariffs from the US, with the impact likely to be mainly absorbed by the supply chain on most categories, meaning consumers could be largely insulated, sources told Undercurrent News.
On July 10, the US Trade Representative published a 205-page list of proposed tariffs, including nearly all categories of seafood produced or processed in China as well as many textiles, fruit, minerals, mechanical and industrial goods. In total, 6,031 tariff subheadings are included. The total is around $200 billion worth of Chinese products. The bulk of the $2.7bn of seafood the US imported from China in 2017 is included. Early October is seen as a likely implementation date.
For tilapia and the whitefish and salmon caught in the US and re-processed in China, sources feel the impact is going to be less than shrimp, due to the current global supply glut of the latter, which is causing low prices.
“For shrimp, there is no reason for the market to accept an increase, due to the supply situation,” said Jeff Sedacca, the president of Sunnyvale Seafood, the US import arm of China’s Zhanjiang Guolian Aquatic Products, a major Chinese shrimp and tilapia supplier to the US.
“If you cut off the Chinese shrimp, there would still be more than enough to supply the US market,” he told Undercurrent.
“A tariff on shrimp could have a very negative impact on Chinese shrimp exporters,” said Peter Redmayne, whose business runs the China Fisheries & Seafood Expo — now the world’s second largest trade show for the sector — held every year in Qingdao.
“There’s a lot of cheap shrimp around these days and the Chinese shrimp exporters may just increase their focus on other export markets, as well as their domestic market. As far as the US consumer is concerned, it won’t change a thing when it comes to shrimp, or most other Chinese seafood imports,” he said.
China has supplied 16,426 metric tons of shrimp to the US from January to June this year, down 17% year-on-year, according to import data from the National Marine Fisheries Service (NMFS).
This is well behind the main suppliers. India shipped 83,733t in the same period; Indonesia, 55,472t; Ecuador, 31,719t; Thailand, 18,227t and Vietnam 17,744t, according to NMFS.
However, China punches above its weight in breaded shrimp. A big chunk of its sales to the US is breaded shrimp. Of the $334 million in shrimp China sent to the US in 2017, $166m was breaded. This is just under half of the total quantity of breaded shrimp the US imported in 2017, which was $340m, the NMFS data shows.
Even with the 10% duty, China will likely still remain competitive against other producing countries on breaded shrimp, said Jim Gulkin, managing director and founder of Siam Canadian Group, a large Asian seafood supplier based in Bangkok, Thailand. Siam Canadian has offices in several Asian countries, including China.
“The Chinese government still gives a very significant rebate to processors on breaded shrimp exports — as well as other seafood products — and the Chinese factories have a high level of efficiency on this product,” he told Undercurrent.
“Since more than half of the Chinese shrimp exports to the US are breaded, Chinese breaders could “tweak” their specs to mitigate the impact of the US tariffs. Chinese breaders account for about half of all US breaded shrimp imports, so they will do what they have to keep their market share,” Redmayne told Undercurrent.
However, like the other major items China is supplying to the US, breaded shrimp is not expensive, said Redmayne.
“The average declared value of Chinese breaded shrimp imports by the US in 2017 was $2.75/lb. A 10% increase is not going to have much impact on demand in my view,” he said.
However, one veteran shrimp sector source, which asked not to be quoted by name, told Undercurrent the tariff might start to push more breading in other countries.
“This might start to push more breading of shrimp at the source, in India. Vietnam can do it, too. VASEP [the Vietnam Association of Seafood Exporters and Producers] says they are looking to do more value-added, as it’s difficult to make money in commodities,” he told Undercurrent. “I don’t know if it will move away from China, or just increase in other countries.
However, he warned there is only scope for a certain amount of breaded shrimp producers. “Also, you need to bear in mind; the breaded market is not very big. If you get too many people in it, the market will crash.”
Supply chain set to absorb increases
For tilapia and the wild whitefish and salmon China processes and sells to the US — much based on Alaskan raw material anyway — there will be less of an impact than with shrimp, Sedacca, Gulkin, and Redmayne said.
“I don’t see a 10% tariff on Chinese seafood as having a big impact on the US market. Most of the Chinese imports are lower value items like tilapia, chum and pink salmon,” he said.
Prices for these commodities fluctuate normally at ranges that often exceed 10%, so demand at the consumer level will be minimally impacted, said Redmayne.
“It’s 10%, not 30%,” Gulkin told Undercurrent. “It’s 10% on a $2-3 item, so you are talking 20-40 cents. It’s not a crazy amount of money; it’s not a market killer. It’s not a 25% duty on a $5 item, you have a buck there, that’s a problem.”
Also, Sedacca and Gulkin both said a weaker Chinese currency would absorb some of the 10% tariffs if they come into play.
However, a weaker CNY means the prices are higher for Chinese processors bringing in US salmon and whitefish, for sale back.
“The CNY has weakened, so that will mitigate a lot of the effect of the duty. The currency has dropped 6%, so maybe there is a 5% increase in price. The processors absorb a couple of percentages and the importers absorb a couple of percentages,” Gulkin told Undercurrent.
The CNY was at 6.27 against the dollar on March 26, but has risen steadily since (see below).
“The [Chinese] currency has devalued and, if we see more interest rate rises in the US as expected, the dollar is going to go up. You could see the Chinese currency go closer to RMB 6 per dollar that would mitigate some of the tariff challenges,” Sedacca said.
“The weakened currency is causing the import costs [for Chinese processors bringing in Alaska whitefish and salmon] of raw material to go higher, which does complicate matters” for re-processors, said Gulkin.
For the wild fish from the US going to China for re-processing and coming back again, Sedacca said an exception might be made. Sources previously told Undercurrent the 25% tariffs China slapped on US seafood would not include products processed and then exported again.
“Ultimately, if the tariffs go through, the US government will probably exempt product produced from American raw material. That is a huge percentage [of the total trade],” he told Undercurrent.
This is in line with what Robert DeHaan, vice president of government affairs and general counsel for National Fisheries Institute (NFI), said on a conference call on July 12.
Although the US government is unlikely to alter its course on applying additional 10% tariffs to a range of seafood products from China before a likely implementation date in early October, the “best case” for changes can be made for seafood caught by US fishermen, processed in China, then brought back for sale to American consumers, said DeHaan.
If the tariffs do go into play for salmon, cod, pollock and other fish from Alaska sent to China, then brought back to the US, the increased cost is likely to be spread through the supply chain, with the consumer largely being insulated, Redmayne told Undercurrent.
“The US companies who are re-processing in China will have a few choices. Lower the price to the fisherman, lower their margin or get retailers to pay more. The most likely scenario is they do a combination of all three,” Redmayne said.
“My guess is, in terms of re-processed product, the 10% increase will be split between US fishermen, who will get less for their fish, re-processors who might have to take a hit on their margin, which is very low anyway and, possibly — but not likely — by retailers who will take a lower markup,” said Redmayne.
The tariffs would, however, put US exporters and Chinese re-processors “at somewhat of a competitive disadvantage, if they are using US product”, Redmayne said.
Also, the weakening of the Chinese RMB, which is a benefit fort exports, makes raw material from the US more expensive to import, said Gulkin.
“Still, there’s no way to replace the huge volume of US — Alaska — product that gets reprocessed gets reprocessed in China”, much of which is then brought back into the country for sale, said Redmayne.
The US exported 121,456t of whitefish to China in 2017, worth $315.32m. Cod and pollock make up the bulk of this. Then, the US imported 116.611t of groundfish back, worth $525.77m. A substantial portion of this would be from US raw material, which has been re-processed.
“For the coldwater fish reprocessing business, there are no significant competitors to China. Vietnam has delved into this to some degree but does not have the processors nor the scale of economies to seriously compete with China,” said Gulkin.
Nobody else has “stepped up” to replace China’s power in processing cold water fish into fillets, he said. “The next play was supposed to be Vietnam, but they don’t have the facilities or the efficiencies. No one can compete with China on twice-frozen fillets.”
It’s a similar picture for tilapia, where there is no other real large volume source than China, said Sedacca.
China exported $690.71m of frozen tilapia fillets in 2017, with $404.92m going to the US. Mexico ($129.01m), Israel (41,776t), and Russia (19,913t), according to mirror data from the International Trade Commission.
“Either the market here is going to accept an increase, or the Chinese will grow less tilapia and shift to other species, like channel catfish or pangasius. It takes little effort to switch,” he said. “The Chinese have developed a taste for American channel catfish, grown in China, of course.”
Redmayne also said the impact would be minimal for tilapia, “where China is really the only high volume supplier of frozen product to the US… the Chinese really have this market to themselves”.
A $0.10 or $0.15/lb. increase in the wholesale price won’t impact demand that much, he told Undercurrent.
“But as always, the real key is supply and demand. At the end of the day, this will have more of an effect on prices than tariffs,” said Redmayne.
“No other producing country can get close to Chinese tilapia fillet prices so again, even with a 10% duty, I don’t see a significant impact and again the weakened RMB further mitigates the effect,” Gulkin told Undercurrent. “On the whole tilapia business, there is not a lot of that going to the US. The main business from China is the fillet business and, on the CO [Carbon monoxide] treated fillets, China is strong, there is no one who can even come close to them.”