Uphill Battle For Salmon Farmers
Sydney Morning Herald
Monday June 3, 2002
Aspects of this industry look healthy but it is highly geared and very competitive, writes Brian Robins.
A series of tough seasons and a collapse in prices have put the ``R" word rationalisation on the agenda for the salmon farm industry, regarded as one of the most vibrant rural industries to emerge since the wine industry took off.
Output has risen by around 80 per cent over the past three years alone and will reach 16,000 to 17,000 tonnes this year, worth upwards of $160 million.
But all of the big players are carrying heavy debts which will limit their ability to benefit from any upturn.
Industry leader Tassal has flagged a $5.5 million pre-tax loss this financial year. But for a change in accounting standards it would have lost money last financial year as well.
Tassal is expected to take part in any industry rationalisation and its bankers are likely to pay close attention, given its high debt levels. Its gearing the ratio of debt to equity stands at around 70 per cent.
To help revive the industry's fortunes, major players have agreed to cut output by some 10 per cent by mainly weeding out smaller, uneconomic stock as they await a pick-up in domestic demand.
Globally, the salmon price has bottomed, in the wake of rationalisation among key foreign producers, although the impact of any improvement will take time to be felt on the bottom line of most in the industry.
For an industry that has emerged from almost nowhere over the past decade, the next 12 months will prove to be vital to its future shape and prospects.
Investors such as Melbourne's Myer family and Rupert Murdoch's sister Helen Handbury and her son Paddy have been attracted to the industry but earlier optimism over its prospects has been tempered by the reality of volatile profits as the industry reaches maturity.
``There is the expectation there will be rationalisation," says Tony Shadforth of stockbroker Shadforths.
``The degree of pain they are exposed to and the attitude of their bankers" will determine when change will come.
``There is the expectation that the worst is over and, globally, the salmon price is improving, but it is the ability to deal with the debt they're carrying that depends on their financiers."
Shares in Tassal, formed in the late 1980s out of a merger of two of the industry's heavyweights and accounting for 35 to 40 per cent of local output, are bouncing around near all-time lows. Another group, Webster's with an estimated 20 per cent of the industry via its Aquatas subsidiary is also out of favour.
The Myer family has a big stake in Tassal, and Paddy and Helen Handbury are big shareholders in Webster's.
After the quantum leap in domestic salmon farm output over the past few years on the back of upwards of $50 million of investment, output growth will taper off this year, argues Mr Owen Carrington-Smith, chairman of the Tasmanian Salmonid Growers Association.
``The following year, 2003, is likely to see supply level off" but, beyond that, growth should resume, he says.
The key will be a resumption of domestic demand growth and the indications here are still mixed.
Sufficient capacity is now in place for the industry to meet demand for the next few years. This will give the industry the breathing space needed to strengthen its battered balance sheets, as long as demand revives.
Over the past few years domestic demand has expanded at a robust 15 to 20 per cent a year, giving the local producers a ready market. That growth has evaporated in the wake of Ansett's collapse and any recovery may be sluggish.
First quarter data shows some growth after a flat December quarter but how long it will take growth to return to former levels is the focus of intense speculation.
While the Tasmanian industry has moved to check output, other domestic rivals are emerging.
After the surprise success of the Tasmanian salmon farm industry, South Australian investors, for example, have begun muscling in.
Output there has now topped 100 tonnes a year as it starts to hit its straps, with Victoria's freshwater trout and salmon industry, centred on the Goulburn Valley, also building up a head of steam.
Any recovery in the domestic market is pivotal to the industry's fortunes, as exports take only around 20 per cent of local output.
Even so, the downturn in world market prices, due to massive over-production and the impact of the collapse in the US market after September 11, has taken its toll.
When domestic demand fell in the wake of Ansett's collapse, weak export markets closed off a key safety valve for local producers.
Dr Vickie Woolley, executive director of the Tasmanian Salmonid Growers Association, said: ``The industry has turned the corner from being an industry providing any amount of product to being in a position of oversupply.
``It has gone through rapid growth and is now in comparative turbulence."
Domestic growth, while robust, has been outstripped by production growth. Hence much of the industry's woes.
But much of the industry's trouble stems from exploding salmon farm output internationally, especially in Chile, where capacity has exploded to an estimated 454,000 tonnes, almost rivalling Norway's 530,000 tonnes.
Much of Chile's production is controlled by Norway's big producers.
Domestically, output cuts and efforts to boost domestic demand will be fundamental to the industry's revival.
Even with the surge in Chile's output, its exports are focused primarily on the US. But when demand there collapsed, Chile's output swamped the world market.
``That overhang is now pressuring the market," says Webster's managing director Rob Woolley.
``US demand is growing at 20 per cent and the price is now starting to stabilise and move up."
Recently, key salmon producers in the local market have raised prices by 50c to 70c a kilogram, rises which have stuck.
Webster's, which boasts of being one of the oldest public companies in Australia, has been through a tough few years but is now showing signs of turning the corner, notwithstanding the problems afflicting its Aquatas unit in the salmon farm industry.
Webster's largest shareholder is Ossa, an unlisted public company controlled by Webster's chairman Rod Roberts. It has 18 per cent of the capital.
Paddy Handbury and his mother Helen hold 11.5 per cent.
Ernie Eves, a longstanding player in the food industry, also has a big stake.
He had a big exposure to the collapse of Panfida Foods in the early 1990s, and went on to found the Original Pretzel company, which was sold in the mid-1990s to United Biscuits.
The industry's recent wobbles came on the back of unseasonably warm weather which has hit output over the past few years, causing a gill disease that hit stock levels and production.
© 2002 Sydney Morning Herald