Export challenges for fishing companies

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Export challenges for fishing companies

LOCAL fishing companies with sizeable export businesses could face some choppy waters in their key markets during the months ahead as the world battles to contain the Covid-19 pandemic.

The latest results from Premier Fishing & Brands (PremFish), which has sizeable export exposure via its squid, lobster and farmed abalone operations, strongly suggest that international seafood trading could be tricky in the months ahead.

In the six month to end February – a period which is traditionally the slower half – Premfish saw revenue decreasing markedly to R215 million (from R287 million) during the same period last year. Gross profit was down even more sharply at R80 million (previously R137 million), and profit after tax more than halved to R20 million.

PremFish said it had to cope with a number of extraordinary factors – most notably the socio-political unrest in the Far East and the Covid-19 outbreak. CEO Rushaan Isaacs said the demand for Premier’s branded products remained strong but Covid-19 had severely impacted the export market of West Coast Rock Lobster (WCRL) and abalone in the Far East, squid in the Italian and Spanish export markets and the export of South Coast Rock Lobster (SCRL) to the USA.

She said PremFish was concerned about the impact that these challenges were having on our business. “However, the Group is in a financially stable position with no debt, is cash positive and we have put strategies in place to mitigate some of the losses the group has suffered because of the pandemic.”

The decline in the squid segment – which is now a large profit centre of PremFish – was arguably the biggest setback.

Chief financial officer Brent Robertson explained that the squid division was hampered by low catch rates industry wide – which led to decline in revenue and in turn profitability. “This division has the tendency to go through seasonal trends, but the potential and outlook in this division remains a positive one.”

It would be a great pity for local hake specialist Sea Harvest if Covid-19 disrupts international markets for a prolonged period.

In recently released 2019 financial results Sea Harvest reported that export revenue from the South African fishing operations increased 26% and that the export mix of revenue increased to 53% (52% in 2018). Export revenue – with the recently acquired Viking fishing operations fully onboard – came in at more than R1.4 billion.

But things are tricky. Sea Harvest’s annual report cited supply side interruptions as the biggest issue.

Although Sea Harvest is classified as an “essential service” provider in the Covid-19 trading environment, the company stressed its most important “asset” in ensuring continued operating were the employees.

CEO Felix Rathebe cautioned: “Unfortunately, when people start getting sick from the virus – and judging by the ease of spread of the virus I believe this is ultimately inevitable – we would experience factory closures, vessels out of operation and a decline in output and productivity.”

He said this would affect Sea Harvest’s revenue line and lead to an increase in costs. “We have also seen backlogs in ports, both in Cape Town and also in all the markets we export to. This will increase as more people are infected, which will affect road and air freight, vessel maintenance in slipways, supplies such as packaging and others.”

“It is too early to evaluate the extent of this, but this to me is a bigger concern than the demand-side effects which can, to an extent, be mitigated.”

Caution is understandable in these circumstances, and it is interesting to note PremFish has opted to put parts of the expansion of its abalone farm on hold during the lockdown period.

PremFish still expects to increase the production capacity from 120 tons to around 300 to350 tons per annum of cultivated abalone once the expansion is completed.

The development is slightly disappointing as PremFish had made encouraging progress at the abalone farm – managing to already increase its export market production by 58% from 120 tons to 190 tons.

It will be interesting to see if PremFish’s more cautious stance on abalone expansion influences other players in that segment – including Sea Harvest (which owns a 50% stake in Viking Aquaculture), Abagold and I&J (which has a well-established abalone farm at Danger Point).

Sea Harvest’s bold move into aquaculture has been a tad disappointing – although it is still early days.

Sea Harvest said aquaculture performance for the year was negatively impacted by lower abalone sales caused by an extended red tide event at the beginning of the year.

Although no animals were lost, this hampered export sales. There were also disruptions to the abalone market caused by political unrest in Hong Kong and China.

Sea Harvest also reported increased competition in the smaller size category from other abalone-producing nations.

However, Ratheb was still upbeat. “Positively, both abalone farms are reaching their design capacity in terms of biomass. These two abalone farms will produce 500 tonnes of abalone at capacity, mostly sold live to Hong Kong and China.”

Sea Harvest disclosed that its aquaculture segment recorded an operating loss for the 2019 financial year of R30 million. This meant the aquaculture business did not achieve the earn-out targets for the year.

In terms of improving performance in the new year, Rathebe said the expansion of the Kleinzee abalone farm in the Northern Cape had been accelerated to provide additional tank capacity for the increased number of abalone to mitigate the negative impact on growth rates.

He added that Sea Harvest was also diversifying the market concentration risk away from Hong Kong by identifying alternative markets for South African abalone. “We are increasing the production of canned abalone and investigating the production of other product formats, including frozen and dried, to appeal to an increased customer base.” Hopefully a prolonged Covid-19 impasse does not negate these plans.

AVI, the holding company for I&J, already warned in March that there was “considerable uncertainty” as to how long the Corona virus and Hong Kong protests would disrupt abalone demand. But the company warned “it is very likely that the contribution from this business will be lower than last year.”

If there is extended pressure on the abalone market for the medium term, this could well play into the hands of SA’s biggest fishing company Oceana. Oceana – which has a dominant slice of the canned fish market in SA – has already openly stated its desire to play in the aquaculture segment. A well priced foray into an established abalone farming operation would make perfect sense in terms of Oceana diversifying away from the regulated local fishing sector.