December 15, 2020
A brighter 2021? Salmon resists COVID-19 deflation but succumbs to Q4 lockdowns
Q4 lockdowns, bloated inventories abort traditional Q4 rally. Upcoming near convergence of Chilean, Norwegian price to create market bottom. Low output growth to induce a 2021 price rebound.
By Eric J. Brooks
An eFeedLink Hot Topic
Bravely defying COVID-19's economic impact for most of 2020, salmon is succumbing to a second wave of COVID-19 lockdowns. Despite enduring serious deflation during Q2's near global depression, salmon traded above 2019's price for 21 of 2020's first 40 weeks or three quarters.
Powered by a 9.8% increase in Chilean production, Kontali estimated that 2019's 7% world output trailed demand growth by around 0.5%. Output continued expanding at this rate in early 2020 –and crashed headfirst into a sharp, lockdown induced drop in Q2 salmon consumption. Before COVID-19's impact, salmon started 2020 trading slightly higher than it did in 2019.
Due to its minor share of its global salmon consumption, China's lockdown had a very small impact: The price fall from NOK79/kg at the start of the year to NOK62.8/kg was in line with the deflation that typically takes place in early Q1. By late Q1 before EU lockdowns took effect, salmon even rebounded to NOK74.2/kg.
Thereafter, with European, East Asia and North America all in lockdown, Q2 saw salmon trade on average 20% below its late Q1 peak and 34.5% less when it bottomed out at NOK48.6/kg in early May.
The good news is that demand quickly recovered when lockdowns ended, implying that COVID-19 has not impacted long-term consumption trends. Consumption veered from depression levels to a V-shaped recovery followed by a new lockdown-induced plunge. Leading producer Mowi estimates that Q3 world market salmon supply exceeded demand by 8,000 tonnes.
That normally is not a problem, as unsold Q3 stocks are normally exported in the cyclically strong Q4 market –but the Q4 COVID-19 lockdowns mean that the expected late-year pick up in prices and demand failed to materialize. Salmonbusiness.com reported one trader stating "The big Christmas rush should have been in full swing now, but they are cautious [in their buying]."
That's not good: As you can see in the accompanying graph, salmon's traditional Q4 price rally (where a high proportion of yearly profits are made), failed to materialize. Europe's Q4 lockdowns appear to have destroyed any traditional Q4 rally momentum.
The good news is that 2020 gave us reasons to be optimistic. First, when lockdowns were removed, consumption almost instantly rebounded. This shows that salmon's strong demand fundamentals were untouched by COVID-19's economic impact.
Second, consumers working from home post-lockdown substituted cooking salmon at home in place of restaurant consumption. So long as lockdowns allow people to work from home, this will dent salmon consumption far less than they did in the Q1 lockdowns.
Third, facing deflationary markets and an uncertain 2021, both Norwegian and Chilean producers cut back their replenishment and slashed H2 2020 production. Market observers expect 2021 Chilean output to fall a whopping 10% to 24%. We forecast a 16.5% fall in 2021 Chilean output drop: From 10% growth in 2019 (to 926,000 tonnes) and 3.5% growth in 2020 (to 958,000 tonnes), we expect 16.5% lower output, totaling 800,000 tonnes in 2021.
Norway will take advantage of lower Chilean output to boost output across all salmonids to a record 1.55 million tonnes. Even so, 3.7% growth is low by historical standards. Even when faster 10%+ growth in some tier 2 exporting nations is added to Norway's, it cannot make up for the massive drop in Chilean salmon output. We conservatively expect a 1.3% output drop across all farmed salmonids, from this year's 3.050 million tonnes back to the 2019 level of 3.005 million tonnes.
Going forward, we now see a pattern of Chilean prices creeping up from their earlier US$3.00/kg (NOK27/kg) lows while Norwegian prices fall towards NOK40/kg. A late-year price bottom should be achieved when Norwegian prices descend to near NOK40/kg (US$4.32/kg) and Chilean prices rise above NOK34/kg (3.77/kg). With supplies rapidly tightening up, Norwegian salmon should close Q4 near NOK45/kg (US$4.97.kg). It should then stay level or trend gently upwards, rather than fall as it usually does in Q1.
Assuming the global economy recovers from the COVID-19 lockdowns next year, 2021 will see demand will grow 1.5% to 3.0% --but farmed salmon output will either have record-low 1% growth or falling output for the very first time. We expect world salmonid output to fall 1.5%, back to the 2019 level of 3.04 million tonnes.
As demand again overtakes supply, the narrow price spread between large and small-sized salmon will widen back to its usual levels. Barring any more COVID-19 induced economic shocks, expect average Norwegian salmon prices in the NOK55/kg to NO70/kg range during most of 2021.
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