Analysis: Small Norway fish farms face M&A as controls bite
OSLO (Reuters) - Norway's booming salmon farm companies face a growth squeeze and merger pressure as regulators crack down on a stubborn sea lice infestation in many of the country's famous fjords.
Though 2010 is shaping up as the best year ever for Norwegian salmon exports, the government has capped production on most of the coast until at least 2012 while imposing strict parasite controls that will make life hard for small fish farms.
"The strong volume growth you have seen in the past decade has come to an end," said Carnegie analyst Tom Christian Jandal, looking back at a doubling of output since 2002 in the world's largest salmon-farming nation.
"What you'll see now is consolidation," he added. "There are many small salmon farmers in Norway, and they are the ones most likely to be acquired."
Acquisitions are already picking up as companies -- cash-rich from high salmon prices -- switch focus from adding raw volume to operating efficiently under Norway's new production caps and anti-lice regimen.
Leroy Seafood this week bought 61 percent of Sjoetroll Havbruk for 540 million crowns ($92.29 million).
Earlier, SalMar bought a majority share of Rauma Gruppen for 305 million crowns and Morpol bought most of Marine Farms for 499 million crowns.
The world's largest salmon farmer, Marine Harvest, wants to join the wave but could bump against a Norwegian rule forbidding anyone from owning more than 25 percent of licenses. It has asked European authorities to overturn the limit.
"Since size and the ability to coordinate will be important to meet the strict new regulations, we'd like to have the opportunity to take part in the coming consolidation," said a Marine Harvest spokesman.
Norway has 100 or so salmon farmers and their contribution to the economy is small relative to the oil industry but still significant -- exports through October totaled 24.9 billion Norwegian crowns ($4.17 billion), 30 percent ahead of exports at the same time last year.
That makes this a good time to pause, said Janne Sollie, head of Norway's Directorate for Nature Management.
For the second year running, she said, the average number of salmon lice on caged fish in several regions exceeds the official limit of one mature female louse or five lice total.
Worse, the parasites are increasingly resistant to chemical treatment. To save Norway's fragile wild salmon stocks from contamination, she demanded a massive rollback of fish farming.
"Even a 50-percent production cut might not be enough," Sollie told Reuters. "The problem is very big, and it is not under control."
Norwegian Minister of Fisheries and Coastal Affairs Lisbeth Berg-Hansen dismissed such views as exaggerated.
But after permitting a modest production rise in remote northern Norway last week, she said no new capacity increases or licenses would be issued until the lice problem in central and southern Norway is solved.
"We will wait until 2012 to consider further capacity increase," she said in a statement. "In the meantime the industry in the rest of the country must use the time right to gain control of salmon lice and the resistance problems."
Among the mandatory new practices driving small Norwegian operators into the arms of their big rivals is mandatory "fallowing," in which farming zones will have to be abandoned for lengthy periods as waste and parasites dissipate. Operators with only a few sites can be left without income in that time.
SHARES STILL BUOYANT
Shares in Norwegian salmon producers have been buoyant as the expanding middle class in countries like China and Brazil push up demand growth and fish prices. Marine Harvest stock is up 47 percent since the Oslo stock exchange benchmark index hit its low for the year on July 1, while Leroy has risen 48 percent.
"The more restrictive Norway is in giving out new licenses, the more it holds down global supply growth and holds up prices," said ABG Sundal Collier analyst Dag Sletmo.
The big fish farmers see today's volume restrictions as temporary. Once they crack the lice problem, they insist, they can safely expand beyond the estimated 0.4 percent of Norwegian coastal waters they currently occupy.
"I thing we can solve the lice bit," Alf-Helge Aarskog, the CEO of Marine Harvest, told Reuters. "If so, there is unlimited room for growth."
Salmon lice, which suck blood and mucous, range in length from less than a millimeter to a centimeter.
They can weaken their hosts until anemia or other fatal diseases take hold, as happened to Chilean farmed salmon in recent years when average lice counts rose above 20 per fish.
Since 2007, Chilean salmon production has plunged, global salmon prices have jumped by about 50 percent and Norwegian production has risen 26 percent to 940,000 tonnes.
But in 2011 production will likely edge up just four percent, according to the Norwegain Seafood Export Council.
"After that, it will flatten out," said Paul Aandahl, the council's salmon market analyst. "As long as the salmon lice problem remains," he added, "more growth won't be possible."
(Editing by Sitaraman Shankar)
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