For Land-based salmon farming the numbers now make sense


Land-based salmon farming: the numbers now make sense

March 29, 2017, 9:39 am
Neil Ramsden
Land-based salmon farming is closer than ever before to being a financially viable alternative to traditional net pens, according to a report by DNB Markets.

With supply growth from traditional farming dwindling due to biological challenges and tighter regulatory controls, and new licences expensive or impossible to secure, land-based is increasingly an answer, wrote analysts Alexander Aukner and Tone Bjornstad Hanstad.

“With low supply growth, salmon prices are likely to stay high for the next two years, reducing the risk of a price collapse before volumes from a land-based project reach the market. At the same time, production costs for traditional and land-based farming are starting to converge as biological costs for sea-based farming increase, and technological advances reduce land-based costs.”

In the past, high production costs and investment needs, combined with elevated risks and the long period from investment to first cash flow, have been major barriers for land-based salmon facilities.

Now, required investment per kilogram of land-based produced salmon produced has fallen with the technological development and increased scale, said DNB.

The risk involved is reduced with experience from operations and examples of successful production and, in addition, the opportunity to invest in establishing new traditional farms is rare.Production costs for traditional farming have increased substantially over recent years, with the average cost per kg head-on gutted in Norway having risen from NOK 26 in 2012 to NOK 35 in 2015, and to an estimated NOK 36/kg in 2016.

“Overall, production costs communicated by industry sources and researchers indicate land-based production costs and traditional sea-based costs are converging at NOK 35–37/kg head-on gutted. The major driver of this is the rapid increase in health-related costs for open net pen farming,” the bank said.

Using estimates based on large-scale, normalized production in RAS facilities – and with the advantage of being built in the US or Asia, that is to say, near to the market – puts the production cost per kg of HOG salmon on a par with traditional open net pens, at NOK 37/kg.

This is based on the removal of NOK 14/kg for transport to the US or Asia.

The bank also noted that open net pen farming carries a cost – it estimates of NOK 5/kg – related to health and biological challenges. Marine Harvest currently estimates NOK 4/kg, it said, though DNB factors in additional costs for increased mortality and reduced growth.

DNB suggested the capex investment required for a land-based operation may now be not far off that for traditional farming either.

“The average investment in equipment for large land-based facilities we have identified with production above 1,000 [metric] tons is NOK 90/kg. For traditional farming, we estimate the investment required in equipment at NOK 15/kg, while the current price of a license is uncertain.”

“No new license have been awarded since 2014, when SalMar bid NOK 66 million for a license. Since then, the Seafood Index (OSLSFX) has doubled, suggesting the market value of a license is also higher.”

Economies of scale have also come in to play in a big way; “what seemed a large RAS [recirculating aquaculture system] only a few years ago is now relatively small”, as DNB noted. The larger facilities being built now have been able to learn from the mistakes of the earliest efforts, inevitably allowing for cost savings.

However, DNB did accept there is plenty of room for error in estimating the capex of the up-and-coming RAS facilities.

Deep pockets already involved in financing

RAS projects require deep pockets for a high start-up cost, and so far these capex moves have been fronted by the founders.

DNB suggests shipping firms Rasmussen-Gruppen and Wilhelmson (which have invested in Nordic Aquafarms) have the resources to fund expansion if the concept is proven to work, while equipment providers have said private equity companies – both Nordic and UK-based – are interested in financing promising land-based projects.

“Most of the older and smaller projects have received financial support from local authorities and/or organizations. Examples of this type of institution are Kuterra in Canada and Freshwater Institute in the US. Both are financially supported by environmental and/or native inhabitants’ organizations with the goal of protecting the coast e.g. First Nations and The Conservation Fund.”

Since June 2016 Norway's directorate of fisheries has begun allocating land-based farming licenses without fees, further helping on the start-up costs.

In short – in the absence of “cheap” new licenses – land-based in regions with transport advantages shows good enough prospects to be taken seriously, DNB concluded.