For thousands of years, humans have relied on fishing to provide a reliable and sustainable food source. Today, commercial fishing has morphed into a global industry, with significant barriers to entry and large amounts of capital investment required.
We explore the South African fishing industry and consider its ability to meet the insatiable global demand for wild-caught fish.
Give a man a rod
The global demand for fish continues to grow unabated as population growth, rising income levels and increasing awareness of the health benefits of eating fish (relative to other animal proteins) make it a popular choice. The supply of wild-caught fish has plateaued since the mid-80s (left chart below), as overfishing and poor marine resource management saw supply unable to keep up with increased demand. The rise in fish-farming, or “aquaculture”, has largely filled the gap between the supply and demand for fish protein, now contributing around 45% of fish consumed.
The South African fishing industry
The wild-caught fishing sector in South Africa falls under the remit of the Department of Environment, Forestry and Fisheries (DEFF) and includes the recreational, commercial and small-scale fishing sectors. The biggest economic contributor is the commercial fishing sector, comprising 22 different fisheries – the largest of which are discussed in more detail herein. We estimate that the fishing industry generates over R25 billion in revenues and employs over 27 000 direct employees, particularly from rural communities and smaller seaside towns.
South Africa’s marine resources have generally been well managed, with quotas allocated to rights holders on a 10- to 15-year basis. This allows rights holders sufficient time to earn a suitable return on the significant capital investment required to fund large seagoing vessel and establish processing facilities onshore. Each year, the Total Allowable Catch (TAC) per species is determined based on the health of the biomass – the size and number of the population of any given species. Quota holders are permitted to catch their allocated share of the TAC, of which a large portion is exported.
The fisheries that generate the largest revenues are tabled below and detailed per species as follows:
• Hake is by far the largest fishery, generating revenues in excess of R5 billion per annum. South Africa’s hake resource has been certified as “blue label”, or sustainable, by the Marine Stewardship Council (MSC) – a designation that sets it apart from other hake resources around the world. Sea Harvest and I&J are the two largest companies with local retail brands and around 60% of their product is exported to Europe and Australia. Cape hake is regarded as a premium product in Europe and Australia based on taste and its MSC blue label status, and is sought after by restaurants and retailers. The large, deep-sea vessels required, coupled with the significant investment behind onshore processing facilities, makes this the most capital intensive of all the fisheries.
• Small pelagic fish (sardines/pilchards and anchovies) are caught using multi-purpose vessels, typically in shallower water than hake. South Africa’s pilchard resource is at a critically low level, however, recent improvements in the biomass are encouraging signs of a recovery. Pilchards are mostly canned and sold in South Africa and neighbouring African countries. The biggest brand, Lucky Star (owned by Oceana), has had to adapt its model to account for the low supply of South African pilchards and is now the largest buyer of pilchards in the world – sourcing them from all over the globe to be canned in South Africa. Locally caught anchovies are used as a protein source in the production of fishmeal (used in animal feed) and fish oil (used for aquaculture) that is sold in East Asia, Europe and the Middle East. Interestingly, the anchovies for sale in South Africa are imported from Europe.
• Squid is normally caught in smaller boats, close to shore, using lines. The biomass can vary significantly from year to year, making it a more unpredictable catch. Almost all South African caught squid is exported to Southern Europe and Japan, where it is known as calamari.
• Horse mackerel is predominantly found off the south coast of Southern Africa and are usually frozen whole once caught. It is sold as a relatively cheap form of protein, mainly in South Africa and other African countries (Cameroon, Nigeria, DRC, Mozambique and Angola) where it is used to make fish stew. Exports into Africa are typically priced in US dollars, with rapid payment terms that produce good cash flow.
Sustainable opportunity in aquaculture
Aquaculture refers to the farming of fish and other organisms in a controlled environment, in either fresh or saltwater. This has seen significant investment in South Africa in recent years and, in 2019, aquaculture generated an estimated R1.1 billion in revenue. Unlike commercial fishing, it does not operate under a quota or TAC regime.
South African aquaculture produces mussels, oysters, seaweed, abalone and dusky kob as saltwater species, and tilapia, barbel and trout in freshwater. Abalone is unquestionably the largest value contributor to the aquaculture industry. It is farmed in tanks along the coast (right chart in first above) utilising fresh sea water that is pumped through the hatcheries.
South African abalone is a highly sought-after, premium species, which is the reason for the rampant levels of poaching along our shorelines. It is mainly sold to China, either canned, frozen or fresh.
Recent riots in Hong Kong and the impact of restaurant closures in China during the Covid-19 pandemic have seen significant disruption to exports, resulting in near-term pressure on profitability for abalone producers. The demand for South African abalone is, however, likely to remain strong when markets recover and the future potential for this industry continues to be bright.
Quite a catch
South Africa has several JSE-listed commercial fishing companies, each with their own unique mix of species and end markets (charted below).
• I&J forms part of the AVI group and has a large exposure to hake through its well-known South African brand and export business. It includes an established abalone business that contributes around 15% to its fishing profits.
• Sea Harvest also has a large exposure to hake. The acquisition of the Viking Seafood business in 2019 resulted in greater exposure to the wholesale fishing channel and its aquaculture business is in the process of ramping up production volumes. Additionally, the acquisition of the Ladismith Cheese Company in 2018 has enabled Sea Harvest to generate around 20% of revenues from dairy products (mainly cheese) sold in South Africa.
• Oceana’s biggest exposure is to pilchards through the “Lucky Star” brand, and fishmeal through its US-domiciled Daybrook business and South African fishmeal operations. Hake and horse mackerel make up the balance of this more diversified specie exposure.
• Premier Fishing is mostly exposed to deep-sea lobster and squid, both of which are predominantly exported.
Fishing for returns
The finite supply of wild-caught fish, with increasing demand, suggests an attractive outlook for those companies that are able to profitably meet this demand. While fishing relies on uncontrollable factors such as the weather and health of the biomass, fishing companies are likely to deliver decent returns to shareholders through the cycle. Considering this, we hold shares in Oceana and Sea Harvest on behalf of our clients.
