The global seafood industry is the most diverse protein industry in the world. Ranging from wild-caught species such as groundfish, tuna and small pelagics to aquaculture species such as Atlantic salmon, marine shrimp, tilapia and pangasius, the seafood sector has many producers and many business models facing different dynamics.
While some wild-catch sectors are subject to increasing regulation and consolidation, aquaculture producers have strong opportunities for organic growth: aquaculture is the world’s fastest growing protein-producing industry.
Interaction between the subsectors is growing as producers from more consolidated seafood sectors are diversifying into subsectors that have higher growth but are more fragmented. The growing global demand for marine proteins and the rapid technological and structural changes in this industry provide opportunities for a range of investors to play a role in the sector’s growth and consolidation and in the formation of uniquely diversified business models.
Introduction
The investment community has been gradually acquiring a growing interest in the global seafood industry, which is defined as the production, processing and marketing of marine species. An increasing number of creditors, funds, private equity and venture capital investors and others are focusing on and becoming active in the seafood industry.
This report provides a framework for analysing this dynamic sector by identifying the drivers and trends and providing a view on the business models adopted by the leading producers. The report also describes the capital flows within the sector and the expected consolidation dynamics that are driving the competitive landscape.
Fish and other seafood have always been an important source of protein. With a total global production volume of 90 million tonnes of wild-caught seafood and 56 million tonnes of aquaculture production, seafood represents 29 per cent of global animal protein production (see Figure 1).
When this figure is adjusted for the wild catch that is used to produce fishmeal and fish oil and therefore not consumed directly, seafood represents 24 per cent of the volume of protein consumed globally (including eggs, but excluding all dairy products). Since on average, seafood is more expensive than most proteins, we estimate that the seafood industry accounts for a 25 per cent to 30 per cent market share of the total global expenditure on proteins.
Having said this, consumption of seafood varies greatly across the world, both in relation to other proteins and in nominal terms. For island countries, such as Japan or Iceland, seafood is the primary protein source. European countries with large coastal populations such as the UK, Norway, Portugal, Spain, France, Italy and Greece are all large consumers of seafood. Similarly in Asia, South Korea, Indonesia, Thailand, Vietnam, Malaysia, Hong Kong and the Philippines are among the leading seafood consumers.
With its abundance of large rivers and lakes, China’s fish consumption is mainly freshwater species. China has been the global growth engine of both seafood consumption and production for the last few decades and has overtaken developed markets such as the European Union (EU) and the United States (US) on a per capita consumption basis.
Although China is the world’s largest seafood market in volume terms, the EU is still considered the world’s most valuable seafood market because of consumer preferences for high-value species and further processing. In developing regions such as India and Africa, the absence of a cool chain means that seafood consumption is limited to the immediate costal area.
Protein consumption in general is low in these regions due to the lower per capita income. The key drivers of seafood consumption are the deployment of modern retail, improvements in the cool chain, rising urbanisation and growth in average disposable incomes. Germany, Poland and Brazil, which are traditionally large consumers of terrestrial proteins, also have relatively low per capita seafood consumption levels.
The key drivers of seafood consumption in these countries are the consumer trend of focusing on healthy and low-fat foods and the growing popularity of Asian cuisine such as sushi. It is clear that demand for marine proteins in both developing and developed regions is growing for a variety of reasons, with the notable exception of Japan. Although seafood consumption in Japan already far exceeds the global average, the consumption of marine proteins is declining because of younger generations' adoption of a more westernised diet and the general decline in population levels.
Alongside marked local differences in consumption, on the supply side, the seafood industry is characterised by regional clusters, with many key species being produced in only a few locations. For instance, close to 90 per cent of Atlantic salmon is produced in just four countries: Norway, Chile, the UK and Canada. Alaska pollock is harvested by Russian and US fleets in the Bering Sea, while the Mekong River in Vietnam accounts for 95 per cent of pangasius production.
This supply-side clustering, combined with increasingly global demand for the main species, has ensured high levels of global trade. Moreover, the outsourcing of labour-intensive activities to processing hubs located in low-cost labour regions, such as cold water shrimp peeling in Morocco and groundfish processing in China, has further boosted trade.
According to the Food and Agriculture Organization of the United Nations (FAO), this trade growth surpassed the USD 100 billion per annum mark in 2008, having doubled over the 10-year period from 1998. In fact, seafood is by far the most traded protein and one of the most traded agri commodities worldwide. It also represents one of the main agri commodities exported by developing countries. On the other hand, the largest developed regions—the EU, Japan and the US—are the largest importers of seafood, importing USD 25 billion, USD 15 billion and USD 14 billion, respectively per year. In these three markets, imports account for approximately 60 per cent to 80 per cent of domestic consumption.
Trade in seafood is expected to continue to grow, driven by the continuing market penetration of a number of leading species. For instance, the growing popularity of tropical species such as the Penaeus vannamei shrimp, tilapia and pangasius in western markets, and the increasing consumption of cold-water species, such as Atlantic salmon in Brazil and some Asian m7arkets, will ensure growth in the trade of seafood products.
The most important distinguishing feature of the global seafood industry is probably the presence of two distinct production systems, wild catch and aquaculture, a combination which also creates the unique dynamic in this sector compared to the other animal proteins. The generally held view is that the wild-catch industry reached its peak in volume terms in the 1990s and has since contracted slightly.
Although some fisheries have benefited from improved management and may increase their catch volumes in the future, others still need to reduce fishing effort in order to achieve long-term sustainability. In contrast to numerous popular media forecasts which suggest the demise of the fishing industry, global wild-catch production is expected to remain stable at the current 90 million tonnes for the foreseeable future.
Consequently, all volume growth within the seafood industry needs to be generated by the aquaculture industry. In fact, aquaculture has been the world’s fastest growing protein sector for the last 30 years. Initially expanding from low volumes, the industry produced more than 56 million tonnes of fish and shellfish in 2009, representing a growth of 420 per cent since 1990, or a compound annual growth rate (CAGR) of close to 8 per cent (see Figure 2).
More recently, the volume expansion dropped to between 5 per cent and 6 per cent per annum and is expected to contract further to between 3 per cent and 4 per cent per annum as the industry gradually matures and is no longer expanding from a small base. Within the next few years, aquaculture will account for over 50 per cent of seafood for human consumption (if wild-catch production used to produce feed is excluded).
It is expected that aquaculture production will surpass 80 million tonnes by 2020, becoming the third-largest protein industry behind poultry and pork, but well ahead of beef.
It is not surprising that aquaculture is expanding faster than the other animal protein sectors, which are, after all, more mature industries. Most modern aquaculture industries such as salmon or seabass and seabream are less than 30 years old, while commercial large-scale aquaculture of pangasius or P. vannamei shrimp for instance is less than 15 years old.
The rate of technological advances in animal husbandry, feed formation, breeding and genetics is still very fast in the aquaculture industry. Arguably these technological advances are continuing to reduce the cost curve of many farmed marine species and are possibly mitigating the impact of rising commodity prices, which are adversely affecting pork, beef and poultry.
Another feature typical of a young industry is large volatility in the volumes produced of a single species, with subsequent large fluctuations in spot prices. On multiple occasions in the recent past, markets such as marine shrimps, seabass, salmon, pangasius and others have all experienced single-year volume growth or contraction rates of 20 per cent to 40 per cent.
Rapid growth in the volumes produced can cause prices to crash well below the cost of production and eventually lead to industry rationalisation. Strong production growth has also contributed to regular disease outbreaks; as production volumes expand driven by high demand and strong profitability, production intensity and capacity utilisation can cause increased stress levels in farmed animals and increase the risk of disease outbreaks.
In turn, a disease outbreak temporarily reduces the supply of a particular species. Nearly all aquaculture industries have experienced significant disease outbreaks at least once in the recent past. In this respect the industry is not very different to the more mature terrestrial animal protein industries which have suffered devastating disease outbreaks such as avian influenza, swine fever and bovine spongiform encephalopathy (BSE).
The wild-catch sector on the other hand is marked by capacity rationalisation, increasing regulation and in some subsectors, consolidation. In North America, Europe, Japan and other regions, fishing fleets are being or have already been downsized. This reduction in fishing effort is necessary to ensure that the wild fish stocks can be exploited at sustainable levels or to allow the wild biomass to grow.
The reduction in the available fishing quota, also referred to as total available catch (TAC), has created a consolidation of certain fisheries with the emergence of large companies owning fleets of 20 to 100 vessels. The formation of large fleets is a feature particular to the groundfish and small pelagic industries and, to a certain extent, the tuna industry.
Given increased regulation and consolidation, the fact that the leading fishing fleets are capable of deploying the largest and most efficient fishing vessels represents a key profitability driver. Once regulated and consolidated, a fishery is a natural oligopolistic industry with few producers and no new entrants, which ensures long- term profitability for the incumbent producers.
Although many fisheries around the world are in need of better management and are mainly made up of small single-vessel family- owned businesses, there are numerous examples that demonstrate that good management founded on sound scientific advice can result in not just improved sustainability, but also in greatly improved profitability of the harvesting sector. The Peruvian anchovy fishery, the world’s largest fishery, is a good example of how better management greatly improved harvester efficiency, product quality and profitability.
Another feature of the wild-catch industry is the growing importance of sustainability certification, which is particularly relevant in North American and European markets. Although there are a number of certifiers, the Marine Stewardship Council (MSC) has emerged as the dominant standard for wild-caught seafood.
Western retailers are becoming the key driver for certification, ensuring that increasing numbers of fisheries apply for MSC certification, which could require making significant changes to how the fishery is managed.
The MSC monitors more than just regulation of the TAC relative to the wild biomass; it also assesses the impact of the fishing activity on the environment, on other species and on the benthic floor, as well as ensuring a chain of custody—in other words, guaranteeing that the final product on the retail shelf is indeed from the certified fishery.
The rapid growth of MSC-certified seafood is further contributing to a gradual transformation of the global fishing industry. Although there is still a long way to go, the trend towards more sustainable practices is certainly present and accelerating.
