Bank forecasts 5% global salmon growth in 2014, lifts price estimate

January 17, 2014, 9:03 am

Norwegian bank Handelsbanken has lifted its growth and price estimate for the global and Norwegian salmon sectors, respectively.

The bank now expects global salmon supply to grow by 5% in 2014, driven by a 7% growth in Europe, but only 2% in the Americas.

The stronger growth than expected in Europe is due to warmer seawater temperatures in Norway, which has boosted feeding and biomass growth, wrote Handelsbanken's analyst Kjetil Lye in a report on the salmon sector, in which he predicted high dividend yields ahead for Norway's salmon producers.

The analyst has increased his 2014 harvest forecast for Norway to 1.24 million tonnes, from 1.20m.

"For 2014, we estimate that global supply growth for Atlantic salmon will reach 5% as
new licence capacity and better growth conditions should boost Norwegian volumes by
8-9%, while we forecast a minor increase in Chilean harvest in 2014. We now see
annual global supply growth of 2-7% as likely in 2014, pending growth conditions in
producing countries," wrote Lie.

Lie noted that the warm sea temperatures, and possible amendments to Norway's rules on maximum allowed biomass (MAB) could lead to greater volumes than expected in Norway, mainly in the second half of the year.

However, he said, "we expect any effects to be temporary". Meanwhile, "significant outbreaks of amoebic gill disease (AGD) in Norway" could also drag supply down more than expected in 2014-2015, he said.

2014: NOK 40/kg

The analyst said he has lifted his price assumption for 2014 to an average of NOK 40.5/kilo, up from his previous estimate of NOK 37.

Even so, Lie noted, "the normal relationship between supply growth and price evolution points to an average price of NOK 43/kg in 2014".

Lie also upped his price forecasts for 2015 from NOK 37 to NOK 40, while targeting NOK 40 for 2016.

The forecast puts Lie lower than Carnegie's Marius Gaard, which recently upped his forecast to NOK 42 for 2014, up from NOK 39. But it is above the prediction from Fondsfinans' Bent Rolland, which expects the average for 2014 to stabilize at NOK 37.30.

Chile: limited growth 'for many years'

For 2015-2017, Handelsbanken forecasts global annual supply growth of 3-4%.

"In Chile, we forecast that a gradual lowering of biomass in Regions X and XI (~95% of Chilean biomass) and a build-up of production capacity in Region XII will imply limited production growth for many years," wrote Lie.

The analyst forecast an Atlantic salmon growth of just 8,000t in Chile in 2014, to 480,000t, a figure which he has as stable for 2015.

"The lower supply growth in the Americas, should boost fundamentals in traditional Chilean salmon markets (US, Brazil) in 2014, while we forecast continued strong prices in European salmon markets."

In Norway, which is also operating close to full capacity, "smolt releases and vaccine sales continue to point to low-to-moderate supply growth in 2015", he said.

Handelsbanken expects a global growth of 3% in 2015.

"We forecast 3% supply growth in 2015 given capacity constraints in Norway and
expectations of no increase in Chilean volumes. Given the limited capacity to
increase production in key producing countries, we further foresee low to moderate
supply growth in 2016-17. We see annual global supply growth of 0-5% as likely in
2015-17, pending growth conditions in producing countries."

Bullish outlook

Overall, Handelsbanken expect strong earnings from the sector, and has lifted its target prices for the salmon farmers it covers, with Marine Harvest, Salmar and Cermaq as its top picks.

"Longer term, we continue to see an unprecedented outlook for strong fundamentals in this sector," said the report. "Given supply-side constraints and robust demand (6-8% annual growth), this sector may enter a prolonged period with significantly higher prices than are currently reflected by consensus."

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