Salmon Rearing Handbook

Salmon Farming Industry
Handbook 2012

The Marine Harvest Salmon Industry Handbook
The purpose of this document is to give financial analysts and
investors a better insight into the salmon farming industry, and what
Marine Harvest considers to be the most important value drivers
.

Contents

1. Introduction 3

2. Definition of segment 4
2.1 Seafood as part of the larger protein space 4
2.2 Stagnating wild catch growing aquaculture 5
2.3 Salmonids only contribute 2.5% of global seafood supply6
2.4 Supply of wild and farmed salmonids 7
2.5 Salmonids harvest 2011 8

3. The attributes of salmon 9
3.1 A healthy product 9
3.2 Resource efficient production 10

4. World market of farmed Atlantic salmon 12
4.1 Estimates of the market for farmed Atlantic salmon 12
4.2 Historic total harvest of Atlantic salmon 13
4.3 Trade and product flow - Atlantic salmon 14
4.4 Projecting future harvest volumes 15
4.5 Yield per smolt 16
4.6 Development in standing biomass 17
4.7 Supply and demand historic prices for Atlantic salmon 18
4.8 Historic price development by local reference prices 19
4.9 Different sizes different prices (Norway) 20
4.10 Price indexes vs. FOB packing plant 21
4.11 Price neutral demand growth - historically 6-7% 22
4.12 Price of Atlantic salmon relative to other proteins sources23

5. Industry structure 24
5.1 Top 5-10 players in main producing regions 24
5.2 Number of players producing 80% of Atlantic salmon 25

6. Production of salmon 26
6.1 Establishing a salmon farm 27
6.2 Access to licenses Norway 29
6.3 Access to licenses Scotland 32
6.4 Access to licenses Chile 33
6.5 Access to licenses Canada 34
6.6 The Atlantic salmon life/production cycle 35
6.7 Production inputs 37
6.8 Factor influencing the pace of production 39

7. Cost dynamics 40
7.1 Economy in salmon farming 40
7.2 Production costs 41
7.3 Cost component mortality and disease 42
7.4 Feed and feed ingredients 43
7.5 Salmon feed producers 44
7.6 Raw material market 45
7.7 Price, cost and EBIT development Norway 46
7.8 Salmon farming is a capital intensive industry 47
7.9 Capital needs when building biomass 48
7.10 Accounting principles for biological assets 49
7.11 Investments and payback time for new entries 50

8. Salmon diseases, mitigation, and R&D 52
8.1 Salmon disease prevention and treatment 52
8.2 Most important disease risks 53
8.3 Fish health and vaccination (Norway) 54
8.4 Research and Development 55

9. Secondary Processing (VAP) 56
9.1 European value-added processing (VAP) industry 57
9.2 Market segment (2009) 58
9.3 The European market for smoked salmon 59

Appendix 60
Weight conversion ratios and key words 61
Some historic acquisitions and divestments 62
Marine raw materials in salmon feed 64
Sustainability of fish feed 65
Atlantic salmon production cycle 66
Marine Harvest history 67
Marine Harvest worldwide 68
Marine Harvest downstream (VAP) 69
Marine Harvest sales channels (2011) 70
Sources for industry and market information 71

Updated as of July 17
th
2012

Disclaimer

While every reasonable precaution has been taken in the preparation of this document,
Marine Harvest assumes no responsibility for errors or omissions, or for damages resulting
from the use of the information contained herein.

The information contained in this document is believed to be accurate. However, no
guarantee is provided. Use this information at your own risk.

3

1. Introduction

Salmon

Salmon is the common name for several species of fish of the family Salmonidae (e.g.
Atlantic salmon, Pacific salmon), while other species in the family are called trout (e.g. brown
trout, seawater trout). Although several of these species are available from both wild and
farmed sources, all commercially available Atlantic salmon is farmed. Salmon live in the
Atlantic and Pacific Oceans, as well as the Great Lakes and other land locked lakes.

Typically, salmon are anadromous: they are born in fresh water, migrate to the ocean, then
return to fresh water to reproduce.

Atlantic salmon farming started on an experimental level in the 1960s but became an industry
in Norway in the 1980s and in Chile in the 1990s.

About 60% of the worlds salmon production is farmed. Farming takes place in large nets in
sheltered quiet waters such as fjords or bays, or in tanks on land. Most of the cultured
salmon come from Norway, Chile, Scotland and Canada.

Salmon is a popular food. Salmon consumption is considered to be healthy because of the
fish's high content of protein and Omega-3 fatty acids.

The volume figures in this industry handbook are mainly expressed in HOG (head on gutted).
For a weight conversion table, see appendix.

4

2. Definition of segment
2.1 Seafood as part of the larger protein space

Source: FAO, Population Division of the Department of Economic and Social Affairs of the United Nations
Secretariat, World Population Prospects: The 2010 Revision

Although 70% of the Earths surface is covered by water, only 6% of the protein sources for
human consumption is produced in this element today. The global population is expected to
grow by 2 billion, to more than 9 billion, by 2050. Assuming consumption per capita stays
constant, this implies a 40% increase in demand for protein.

The estimates for population growth, however, assume that the growth will mainly occur in
Asia and Africa, which has the lowest protein consumption per capita today. When factoring
in a trend of increased consumption per capita in these areas, the demand may double by
2050. Knowing that resources for increased land-based protein production will be scarce, a
key question is how protein production in sea can be expanded.

5

2.2 Stagnating wild catch growing aquaculture

Atlantic
salmon

Source: Kontali Analyse, FAO, OECD

There has been a considerable increase in total and per capita fish supplies over the past
few decades. Aquaculture is the fastest growing animal food producing sector, and in 2011
the aquaculture industry contributed 42% of the fishery output for human consumption. On
average, fish provides about 30 kilocalories per person per day globally. The dietary
contribution of fish is more significant in terms of proteins - it provides the worlds population
with 6% of their intake of protein.

While global human population is growing at 1.7% annually, aquaculture outpaces this rate
by 1.4% - growing at 3.1% annually.

Annual per capita fish consumption rose from 9.9kg in the 1960s to 18.4kg in 2009. A total of
126 million tonnes (live weight equivalent) fish was available for human consumption in 2009,
where Asia consumed almost two thirds. To maintain current consumption level in 2030
taking population growth into account, an additional 23 million tonnes of fish production is
needed.

With the stagnating wild catch, the growth in fish production (and protein supply) is expected
to come from the fast growing aquaculture industry. FAO estimates that in 2030, aquaculture
will have increased from 45 million tonnes to 85 million tonnes.

6

2.3 Salmonids only contribute 2.5% of global seafood supply

Source: Kontali Analyse

Even with an increase in production of Atlantic salmon of more than 600% since 1980, total
global supply of salmonids is still marginal compared to most other seafood categories.
Whitefish is about ten times larger and consists of a much larger number of species.

Fish species - harvest/catch volumes 2010

Note: live weight is used because different species have different conversion ratios

The graph compares selected species and their respective harvest/catch volumes in 2010.
Harvest of Atlantic salmon was more significant than Atlantic cod and pangasidae. But,
compared to two the largest whitefish species, tilapia and Alaska pollock, Atlantic salmon
was only about half the volume harvested.

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Tilapia and
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Alaska
Pollock
Atlantic
salmon
Pangasidae Atlantic cod Large trout Bass &
Bream
Coho
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Selected seafood species 2010
Wild
Farmed

7

2.4 Supply of farmed and wild salmonids

Historical supply of farmed and wild salmon

Note: Small and large trout are not included in farmed volumes

The general supply of seafood in the world is shifting more towards aquaculture as the supply
from wild catch is stagnating in several regions, and for many important species. Wild catch
of salmonids is varying between 700 000 and 1 000 000 tonnes HOG, whereas farmed
salmonids are increasing. The first year when the total supply of farmed salmonids was
dominated by farmed, was in 1999. Since then, the share of farmed salmonids has increased
and has become the dominant source. The total supply of all farmed salmonids was over 1.6
million tonnes (HOG) in 2011. The same year, the total catch quantity of wild salmonids was
about 930 000 tonnes, with pink, chum and sockeye being most common species.

Origin and markets for wild salmonids

The diagram shows competition of wild salmon in different markets for Atlantic salmon. About
25% of total wild catch of salmon has been imported frozen to China (from the US, Russia
and Japan), and later been re-exported as frozen fillets. Once re-exported from China, one
cannot distinct between the different regions.
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2003 2004 2005 2006 2007 2008 2009 2010E 2011E
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Wild
Farmed

8

2.5 Salmonids harvest 2011
Farmed Atlantic salmon dominates

Atlantic salmon: By volume, the largest species of salmonids. It is a versatile product, which
can be used for a variety of categories such as smoked, fresh, grilled, sushi as well as ready-
made meals. The product is present in most geographies and segments on a global scale.
Due to biological constraints, seawater temperature requirements and other natural
constraints, farmed salmon is only being produced in Norway, Chile, UK, North America and
New Zealand/Tasmania. In 2011, the total supply of Atlantic salmon was 1.46 million tonnes
HOG.
Pink: Caught in USA and Russia and used for canning, pet food and roe production. Quality
is lower than the other species as all catch happens in a very short time period and is
therefore less a valued salmonid. The fish is small in size (1.5-1.7 kg).
Large trout: Produced in Norway, Chile and the Faeroes and the main markets are Japan
and Russia. Trout is mainly sold fresh, but is also used for smoked production.
Small trout: Produced in many countries and most often consumed locally as a traditional
dish as hot smoked or portion fish. Small trout is not in direct competition with Atlantic
salmon.
Chum: Caught in Japan and Alaska. Most is consumed in Japan and China. In Japan, it is
available as fresh, while in China it is processed for local consumption and re-exported. Little
chum is found in the EU market. Varied quality and part of the catch is not for human
consumption.
Coho: Produced in Chile and is mostly used for salted products. It is in competition with trout
and sockeye in the red fish market. Russia has increased its import of this specie the last
years but Japan remains the largest market.
Sockeye: Caught in Russia and Alaska. It is mostly exported frozen to Japan, but some is
consumed locally in Russia and some is canned in Alaska. Sockeye is seen as a high quality
salmonid and is used as salted products, sashimi and some smoked in EU.
Chinook/King: Low volume species, but highly valued. Alaska, Canada and New Zealand
are the main supply countries. Most volume is consumed locally. Chinook is more in direct
competition to Atlantic salmon than the other species and is available most of the year.

9

3. The Attributes of Salmon
3.1 A healthy product

Farmed salmon is a good source for the marine
omega-3 polyunsaturated fatty acids
eicosapentaenoic acid (EPA) and docosahexaenoic
acid (DHA) that reduce the risk for cardiovascular
disease. Data also indicates the EPA and DHA
reduce the risk for a large number of other health
issues.

Salmon is view upon as a very versatile product,
which can be used in a numerous dishes. It is
popular with retailers as it is produced in a
controlled environment and is stable in supply
throughout the year (not subject to seasons).

Source: FAO, Marine Harvest

Salmon is nutritious, rich in micronutrients, minerals, marine omega-3 fatty acids, very high
quality protein and several vitamins, and represents an important part of a varied and healthy
diet. FAO highlights Fish is a food of excellent nutritional value, providing high quality protein
and a wide variety of vitamins and minerals, including vitamins A and D, phosphorus,
magnesium, selenium and iodine in marine fish.

The substantial library of evidence from multiple studies on nutrients present in seafood
indicates that including salmon in your diet will improve your overall nutritional status, and
may even yield significant health benefits. In the face of increasing obesity and decreasing
health standards, governments and food and health advisory bodies in Europe and the USA
are actively encouraging their populations to consume more fish as part of their diet.

10

3.2 Resource efficient production

Source: Marine Harvest, article in Fiskaren March 20 2009, British PIG BPEXX Yearbook 2007, www.pork.org

Protein production efficiency

The main sources of animal protein are cattle, poultry, pork and seafood. The first three are
farmed, while more and more of the available seafood is also farmed.

One method to measure how productive the different protein productions are is the
representative feed conversion ratio (FCR). In short, this tells us the kilograms of feed
needed to increase the animals bodyweight by 1kg. If we compare farmed salmon with the
other three species, we find a variation in the FCR between 1.2 and 8.0, where salmon is the
most efficient in production and cattle are the least. The main reason why salmon convert
feed to body weight so efficiently is that by being cold blooded they do not have to use
energy to heat their bodies.

Wild salmon has a FCR of approximately 10.0.

68 % of Atlantic salmon is edible meat

Source: Bjrkl, J., Norwegian University and Life Sciences, Norway (2002).
8.0 3.0 2.0 1.2 10.0
Cattle Pork Poultry Farmed
salmon
Wild salmon
Feed Conversion Ratios
0%
20%
40%
60%
80%
Atlantic salmon Pork Chicken Lamb
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Edible yield

11

3.2 Resource efficient production

Most of the fish is edible meat, while other sources of meat have a higher level of waste or
non edible meat. The combination of the FCR ratio and edible yield, gives salmon a
favourably high volume of edible meat per kg of feed fed, as the graph below shows.

Source: FHL

Comparing the amount of protein in edible parts to amount of protein fed to the animal,
salmon retains the most protein relative to other animal protein sources as pork, chicken and
lamb.

Source: Bjrkl, J., Norwegian University of Life Sciences, Norway (2002).

Freshwater consumption in production

Freshwater is a renewable but limited natural resource, which can only
be renewed through the process of the water cycle. If more freshwater
is consumed through human activities than is restored by nature, the
result is that the quantity of freshwater available in lakes, rivers, dams
and underground waters, is reduced. This can cause serious damage
to the surrounding environment.
Farmed Atlantic salmon requires only 1,500 litres per kg of fresh water
in production whereas producing 1 kg beef requires 14,000 litres of
fresh water consumption!
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Salmon Chicken Pork
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Edible meat per 100kg feed fed
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Atlantic salmon Pork Chicken Lamb
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Protein Retention

12

4. World Production and Market of Farmed Atlantic Salmon
4.1 Estimates of the market for farmed Atlantic salmon


Supply of Atlantic salmon has more than doubled since 2000 (annual growth of 7%). Due to
various constraints, Kontali Analyse expects annual supply growth of Atlantic salmon to drop
to 4% in the period 2013-2020. The EU and the US are by far the largest markets for Atlantic
salmon. Emerging markets, however, are growing at significantly higher rates than these
traditional markets. As all harvested fish is sold and consumed in the market, the demand
beyond 2013 is assumed equal to supply (estimated from Kontali Analyse). As can be seen
from the below graph, salmon is one of the food categories that grows at a significantly
higher rate than the worlds human population.

Source: Kontali Analyse, Population Division of the Department of Economic and Social Affairs of the United
Nations Secretariat, World Population Prospects: The 2010 Revision

13

4.2 Historic total harvest of Atlantic salmon

Farming of Atlantic salmon has always been dominated by a few producing countries as
there are several natural conditions that have to be in place for optimal production, like
seawater temperature range (see chapter 6), a sheltered coast line and certain biological
conditions.

In the beginning of the 2000s, Chile started to increase production sharply. However, in 2007
there was an outbreak of the ISA virus, which resulted in a serious production setback (2009-
2011). Since 2010, Chilean industry has been subject to an aggressive rebuild. The
production in Canada and the UK has been stable the last 5 years, and has limited potential
for future growth. Other regions have generally been growing, but from rather marginal
volumes.
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14

4.3 Trade and product flow Atlantic salmon

Historically, the main market for each origin has been:
Norway EU, Russia and Asia
Chile USA, South America and Asia
Canada USA (west coast)
Scotland mainly domestic (limited export)

The logistic and perishability of the product has led to this supply trend. A new trend since the
beginning of this millennium has been that Norwegian fresh salmon meet more competition
from Chilean frozen salmon in the European market. This, together with strong competition
between mainly Norwegian and Chilean salmon in the Japanese market, and the increase in
export from Scotland and Norway to USA during the period of reduced supply from Chile,
shows that the market is becoming more globalised. Nevertheless, there will still be regional
markets for the different production countries due to cost of logistics for fresh salmon. It is
only frozen salmon that can be made available in large volumes for distant markets at low
costs. It is generally expected that the market will continue to have a preference for fresh
salmon, going forward.

Global trade flows of farmed Atlantic salmon - 2011 (HOG)


15

4.4 Projecting future harvest volumes

The three most important indicators on future harvest volumes are standing biomass, feed
sales and smolt release. These three are good indicators on medium term and long term
harvest, while the best short term indicator is standing biomass categorized by size. As most
fish is harvested at a size of 4kg+, it is only the amount of large fish in the sea that can be
used to estimate short term harvest.

If no actual numbers on smolt releases are available, vaccine sales could be a good indicator
of number of smolt releases and when the smolt is put to sea. This is a good indicator on
long term harvest as it takes up to 2 years before the fish is harvested after smolt release.

Variation in seawater temperature can materially impact the length of the production cycle. A
warmer winter can for example increase harvest volumes for the relevant year, partly at the
expense of the subsequent year.

Disease outbreaks can also impact harvest volume due to mortality and slowdown of growth.

Standing Biomass
Source: Kontali
Feed Sales
Source: feed companies
Seawater
Temperature
Source: Meteorological
institutes
Disease
Outbreaks
Source: Media
Smolt
Release
Source: Producing
companies
Vaccine
Sales
Source: e.g.
ScanVacc

16

4.5 Yield per smolt

Source: Kontali Analyse, Marine Harvest

Yield per smolt is an important indicator of production efficiency. Due to the falling cost curve
and the discounted price of small fish, the economic optimal harvest weight is in the area of
4-5kg (HOG). The number of harvested kg yielded from each smolt is impacted by diseases,
mortality, temperatures, growth attributes and commercial decisions.

The average yield per smolt in Norway was 3.79 kg (HOG) in 2010.

Since 2010, the Chilean salmon industry has been rebuilding its biomass after the depletion
caused by the ISA crisis commencing in 2007. In 2010/2011, the Chilean salmon industry
showed a very good performance on fish harvested due to the low density of production
(improved yield per smolt). With the increased density it is possible the performance is
deteriorating in 2012.

Average yield in the UK and Faroe Islands in 2010 was 3.05kg and 4.49kg, respectively.

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Norway
Chile
UK
Faroe Islands

17

4.6 Development in standing biomass


Because of the variation in sea water temperatures over the year, the total
standing biomass in Europe has a S-curve, which is at its lowest in May and at
its peak in October. The Norwegian industry is focused on minimizing the
natural fluctuations as license constraints put a limit to how much biomass can
be in sea at the peak of the year.

In Chile the situation is different due to more stable seawater temperatures
and opposite seasons (being in the Southern hemisphere). A more steady
water temperature gives the possibility to release smolt during the whole year
and a more uniform utilization of the facilities. The reduction of standing
biomass in Chile in 2008 and 2009 is due to the impact of the ISA disease.

18

4.7 Supply and demand historic prices for Atlantic salmon


Due to the long production cycle and the short shelf life of the fresh product (maximum 3
weeks), the spot price clears on the basis of the overall price/volume preference of
customers.

As most of the farmed salmon is perishable and therefore marketed fresh, all salmon
produced in one period has to be consumed in that same period. In the short term, the
production level is difficult and expensive to adjust as the planning/production cycle is three
year long. Therefore, the supplied volume is very inelastic in short term, while also demand is
shifting with the season. This has a large effect on the price volatility in the market.

Factors affecting market price for Atlantic salmon are:
Supply (absolute and seasonal variations)
Demand (absolute and seasonal variations)
Globalisation of the market (arbitrage opportunities between regional markets)
Presence of sales contracts reducing volume availability for the spot market
Flexibility of market channels
Quality

Comparing FCA Oslo, FOB Miami and FOB Seattle, there are clear indications of a global
market as the prices correlate to a high degree.

19

4.7 Historic price development by local reference prices

The three graphs above shows quarterly average prices of salmon from 2000 to Q2 2012.

As in most commodity industries, the producers of Atlantic salmon are experiencing much
volatility in the price achieved for the product. The average price for Norwegian whole
salmon the last decade has been about NOK 27/kg (HOG), for Chilean salmon fillet (2-3lb)
USD 3.1/lb, and for Canadian salmon (10-12lb), USD 2.24/lb (HOG).

20

4.8 Different sizes different prices (Norway)

The most normal market size for a salmon is 4/5kg HOG. The reason for the different sized
fish is mainly because salmon farming is a biological production process, where the fish has
different growth cycles and the biomass represents a normal distributed size variation.

The markets for the different sizes vary, as can be seen in the above graph. The processing
industry in Europe mainly uses 3-6kg HOG but there are niche markets for the small and
large fish. As these markets are minor compared to the main market, they are easily
disrupted if volumes become too high. Generally, small fish sizes are discounted and large
sized fish are sold at premium.

21

4.10 Price indexes vs. FOB packing plant

* Average difference between SSB and return to packing plant
Source: Fishpool, NOS/FHL, SSB, Norwegian Seafood Council, UrnerBarry, Kontali Analyse

Several price indices for salmon are publicly available. The two most important providers of
such statistics for Norwegian salmon are NOS/Fish Pool and Statistics Norway (SSB). Urner
Barry in the US provides a reference price for Chilean salmon in Miami and Canadian salmon
in Seattle.

In Norway this is fairly simple by deducting freight cost from the farm to Oslo and the terminal
cost from the NOS/FHL price (~0.70 NOK). If using the SSB custom statistics, you need to
adjust for freight to border, duty and taxes, and also to adjust for quality and contract sales to
get the achieved spot price back to producer. Average difference between SSB price and
FCA Oslo is ~1 NOK, which gives the average difference between SSB price and back to
plant at NOK 1.50**.

Calculating Urner Barry Chilean fillets, back to HOG plant is more extensive. It is necessary
to use UB prices for both 2/3lb and 3/4 lb and adjust for volume share, market handling (4
cent), market commission (4.5%), premium fish share (92%), reduced price on downgraded
fish (30%), airfreight (USD 1.50/kg) and HOG to fillet yield (70%).

**Historically this difference fluctuates from week to week and will normally be observed in the range of
[-2 to +4]

22

4.11 Price neutral demand growth - historically 6-7%

r= -0.866


The price correlation across regional markets is generally strong for Atlantic salmon.

The Norwegian FHL price represents about two thirds of the global volumes for Atlantic
salmon.

Growth in global supply of Atlantic salmon is estimated to 119% in the period 2000-2012
(annual CAGR 7%), varying between -2% and 13% annually. Variation in growth rates has
been the main determinant for the variation in prices. Annual average prices have varied
between NOK 19.50 (2003) and NOK 37.45 (2010).

Combining the data gives a linear correlation between change in global supply and change in
the Norwegian FHL price. This relation has an explanatory power of almost 87% of the
annual price development between 2000 and 2011.
-30%
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Global supply change
Y-o-Y
Global supply
growth
Change in av. price
FCA Oslo
2000-01 13,3% -27 %
2001-02 7,0% -8 %
2002-03 8,2% -4 %
2003-04 5,5% 11 %
2004-05 3,7% 18 %
2005-06 1,6% 24 %
2006-07 10,0% -21 %
2007-08 6,7% 3 %
2008-09 -1,7% 18 %
2009-10 -1,4% 24 %
2010-11 12,0% -19 %

23

4.12 Price of Atlantic salmon relative to other proteins sources

Source: International Monetary Fund, Marine Harvest, Norwegian Seafood Council

Compared to other food sources containing animal protein, salmon has become relatively
much cheaper during the last decades.

Relative price of salmon in terms of other protein sources in selected major markets
(snap-shot of consumer prices in selected retail stores, June 2012)

Salmon/Beef Salmon/Chicken Salmon/Pork
UK 0.8 1.4 1.8
US 1.3 2.4 1.9
Belgium 1.2 1.9 1.6
Japan 1.0 2.2 2.0

Despite salmon having become relatively cheaper over time, it is still a rather expensive
product in the shelves.

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1980 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Relative price development 1980-2012
Beef
Lamb
Pork
Chicken
Salmon

24

5. Industry Structure
5.1 Top 5-10 players in main producing regions of farmed Atlantic salmon
(2011)


The Marine Harvest Group represents the largest total production and holds about one
quarter of the volume in Norway, and about one third of the volume in North America and UK.

In North America and the UK, production is more consolidated (see next page).

In Norway and Chile there are several more companies with a significant production volume
of Atlantic salmon. In Chile, several of the companies also produce other salmonids, such as
coho and large trout.
tonnes HOG
Top 10 Norway H.Q. Top 10 UK H.Q. Top 10 North America H.Q. Top 10 Chile H.Q.
1 Marine Harvest 217 500 Marine Harvest 50 100 Cooke Aquaculture 34 200 Marine Harvest 26 800
2 Lery Seafood 117 000 The Scottish Salmon Company 23 000 Marine Harvest 33 900 Salmones Multiexport 25 200
3 Salmar 93 000 Scottish Seafarms 21 800 Cermaq 21 300 Pesquera Los Fiordos 22 500
4 Cermaq 37 900 Morpol (Meridian Seafood) 20 800 Grieg Seafood 12 200 Australis Seafood 18 000
5 Grieg Seafood 31 500 Grieg Seafood 14 800 Northern Harvest 9 000 Cermaq 15 400
6 Nordlaks 26 100 * * Salmones Cupquelan (Cooke) 13 500
7 Nova Sea 25 200 Empresas Aquachile 12 900
8 Alsaker Fjordbruk 24 800 Invertec 11 200
9 Bremnes Seashore 21 000 Aquinova (Pesca Chile) 8 100
10 Norway Royal Salmon 18 800 Salmones Friosur 7 200
Top 10 612 800 Top 10 130 400 Top 10 110 600 Top 10 160 700
Others 292 200 Others 8 800 Others 4 900 Others 38 200
Total 905 000 Total 139 200 Total 115 500 Total 198 900
* UK and North American industry are best described by top 5 producers.

25

5.2 Number of players producing 80% of Atlantic salmon
volume per region


Historically, the salmon industry has been made up by many, small firms. This has been the
case in Norway, and to some degree in Scotland and in Chile.

The higher level of fragmentation in Norway compared to Chile is the result of the Norwegian
governments priority to decentralised structures and local ownership. In Chile the
government put fewer demands on ownership structures in order to grow the new industry
faster.

During the last decade the salmon farming industry has been through a period of
consolidation in all regions. The consolidation trend is expected to continue.

The recent increasing number of players making up 80% of the volume in Chile is explained
by the major reduction in output in connection with the ISA crisis. Given the current rebuild,
the situation is expected to gradually revert to fewer players.

See appendix for some historic acquisitions and divestments.

0
10
20
30
40
50
60
70
Norway
Chile
Scotland
Canada
Australia
Faroe
Island
22
16
4
3
2
2
28
16
3
3
2
3
31
11
5
3
45
15
7
8
55
18
8
70
35
12
2012 (Per date) 2009 2006 2003 2000 1997

26

6. Production of salmon

In all salmon producing regions, the relevant authorities have a licensing regime in place. In
order to operate salmon farming, a license is the key prerequisite. The licenses constrain the
maximum production for each company and the industry as a whole. The license regime
varies across jurisdictions.

The salmon farming production cycle is about 3 years. During the first year of production the
eggs are fertilised and the fish is grown into approx. 100 grams in controlled freshwater
environment.

Subsequently, the fish is transported into seawater cages where it is grown out to approx. 4-
5kg during a period of 14-24 months. The growth of the fish is heavily dependent on the
seawater temperatures, which varies by time of year and across regions.

Having reached harvestable size, the fish is transported to primary processing plants where it
is slaughtered and gutted. Most salmon is sold gutted on ice in a box.

27

6.1 Establishing a salmon farm

License and location (Norway)

Since 1973, a license has been required to operate a salmon farm in Norway. A license gives
the right to farm salmon either in freshwater or in the sea. In addition, a site where the license
can be used must be granted. One license can be associated with up to four sites, and one
site may use several licenses at the same time. These licenses are awarded by the Ministry
of Fisheries and are administered by the Directorate of Fisheries. It is also possible to apply
to the Directorate of Fisheries to change the size of a site and licenses can be traded
between companies in the industry. Since 1982, new licenses have been awarded only in
limited numbers the years 1985, 1988, 1999, 2001, 2002 and 2009. At the end of 2011, there
were 990 seawater licenses in Norway. One license is set to a MAB of 780 tonnes (900
tonnes in Troms and Finnmark). Most Norwegian fish farming sites have between 2,340 and
3,120 tonnes allowed maximum standing biomass.

License and location (Scotland)

In Scotland, the licensing system is very different. Instead of a license, there are several
institutions that that have to give permission before one is allowed to make use of an area.

Individual site biomass is governed by environmental concerns, namely the assimilative
capacity of the local marine environment. As a consequence, individual site biomass is not
uniform but varies between 100 tonnes to 2,500 tonnes depending on site characteristics.

28

6.1 Establishing a salmon farm

License and location (Chile)

In Chile the licensing is based on two authorizations. The first is the authorization to operate
an aquaculture facility, which is issued by Fishery Sub Secretary (Economy Ministry). The
authorization is for unlimited time and can be traded. The second authorization is for the
physical area to operate (or permission to use national sea areas for aquaculture production).
This is issued by the Sub secretary of the Navy, which belongs to the Defence Ministry. The
use of the license is restricted to a specific geographic area, to defined species, and to a
specified limit of production or stocking density. The production and stocking density limit is
specified in the Environmental and Sanitary Resolution involved for any issued license.

License and location (Canada)

Marine sites are located on Crown land. The Provincial Government needs to grant a so-
called tenure license to occupy a certain area of the ocean bottom. These tenures are issued
for periods varying from 5 to 15 years. An annual tenure rental fee is charged depending on
the size of the tenure. Fees are increased annually with inflation. In 2012 the annual fee for a
typical tenure of 25 ha is CAD 9,800. Tenure licenses can be renewed upon request.

In addition, the Federal Government needs to grant a license of operation. This Federal
License states all the conditions which the farm has to observe and regulates production
parameters, such as the Maximum Allowable Biomass, the use of equipment, etc. A typical
site license will range in size from 2,000 MT to 4,500 MT of Maximum Allowable Biomass.
The Federal License is presently issued for one year at the time and is renewable. It is
expected that as of 2013 a fee will be charged for this license based upon the amount of
production on the farm, however, the exact details are not known at this point of time.

The Provincial and Federal licenses are specific for one location only. Licenses may be lost
for non-compliance issues and non-payment of fees.

Equipment

To equip a grow-out facility you need cages (steel or plastic), mooring, nets, cameras, feed
barge/automats and boats. For a normal facility in Norway (850,000 smolt release) the
investment costs would be in the range of 25-30 million NOK.

29

6.2 Access to licenses - Norway

It is legal to trade licenses in Norway, however there are some restrictions. If the buyer,
through trade, gets control of more than 15% of the total licensed biomass in the country,
he/she has to apply for an approval from the Ministry of Fisheries and Coastal Affairs. The
Ministry cannot give the approval if it implies that the buyer gets control of more than 25% of
the total biomass in the country. No owner can control more than 50% of the total biomass in
any of the regions. In 1993, a salmon farming license was traded for NOK 200 000, while the
price today is normally about MNOK 20-70. In the last round of new licenses from the
government, the price was however heavily discounted (cost of MNOK 8 per license) and
awarded to small players operating in rural areas. Many of these licenses have since been
sold at large gains.

When assignment for a license is given, it has to be used within two years with a minimum of
one third of the allowed biomass. A license can be withdrawn if the owner has not been
approved for a site no later than 6 months after he was granted the license. A license can be
pledged. A license cannot be leased out.

Example

The figure below depicts an example of the regulatory framework in Norway.
1 company
Number of licenses for a defined area: 5
o Biomass threshold per license: 780 tonnes live weight (LW)
o Maximum biomass at any time: 3,900 tonnes (LW)
Number of sites allocated is 3 (each with a specific biomass cap)
In order to optimise the production and harvest volumes over the generations, the
license holder can play within the threshold of the three sites as long as the total
biomass in sea never exceeds 3,900 tonnes (LW).

30

6.2 Access to licenses Norway

2012 utilisation per license for the industry and the largest companies

Source: Marine Harvest, Kontali Analyse, Fiskeridirektoratet, Quarterly reports

The graph is organized by highest harvest volume.

Number of sea water licenses for salmon and trout in commercial use
o 2007: 929
o 2008: 916
o 2009: 988
o 2010: 991
o 2011: 990
o 2012: 990

Because of the regulation of standing biomass (maximum allowed biomass - MAB) per
licence (780 tonnes LW) the production capacity per licence is limited. Annual harvest
volume per license in Norway can be as much as 1,200 tonnes HOG. Larger players typically
have better flexibility to maximise output per license. The average utilisation for the industry
is hence lower than the utilisation for the largest companies.

0
200
400
600
800
1000
1200
1400
Average
Norway
Marine
Harvest
Norway
Company
A
Company
B
Company
C
Company
D
'
0
0
0

t
o
n
n
e
s

H
O
G

Average harvest per license 2012

31

6.2 Access to licenses - Norway

Industry production is approaching its limit (Norway)

Estimated MAB-utilisation in Norway 2009-2012E


Due to the fact that the two counties Troms and Finnmark, in Northern Norway, have a higher
MAB per license, the total MAB capacity is slightly higher than 780 tonnes LW per license.
Total biomass of salmon and trout in Norway is increasing each year and is approaching the
limit in terms of MAB, particularly in the second half of each year due to the seasonality of
farming operations.

32

6.3 Access to licenses - Scotland

In Scotland it is legal to trade licenses and although no restriction on number is given, there
is a limit on production volume ascribed to any one company. This limit is determined by the
Competition Commission Authorities. Licensing aquaculture operations in the UK is currently
in a transitory state; all new applications require planning application for permission to
operate, as well as an environmental and Crown estate license. The granting of the planning
permission is aligned to the Crown estate lease for a 25 year period. All existing fish farm
leases in Scotland are currently undergoing a review process which transfers them from the
Crown estate to local regional councils. These grants are automatically given a 25 year
lease.

The environmental license can be revoked in some cases for significant and long-term non-
compliance.

Most existing licenses are automatically renewed at the expiration of the relevant lease
period.

New license applications take around 6-12 months for the planning permission and around 4-
6 months for the environmental discharge license. Expansion of existing facilities is the most
efficient route in terms of cost and time, whilst brand new sites will take longer and will
probably have to go through an EIA (Environmental Impact Assessment) process. The
environmental license is charged annually at 5,000, whilst the standing rent is levied to the
crown estate on production basis (15-17 / tonne). The applications are also charged at
145 per 0.1 hectare of farm area, while the environmental license costs 2,600 for a new
site.

33

6.4 Access to licenses - Chile

The trading of licenses in Chile is regulated by the General Law on Fisheries and
Aquaculture (LGPA), in charge of Ministry of Economy and Defense.

Licenses granted before March 2010 are issued for an indefinite period of time. However, for
companies that require loans from the state, license period is cut from indefinite to 25 years
(extension may be granted). According to the new regulation, licenses issued subsequent to
March 2010 and licenses that have been subject to modification, have a defined horizon of
25 years. This time horizon may also be extended under certain circumstances. Licenses can
be lost in case of specified violations to regulation, operation under the minimum limit during
certain period, or voluntary resignation. It can be lost if e.g. the license is used for a different
purpose than the one for which this was granted or environmental/sanitary violations among
others. Main issues in the new legislation are:

General Law on Fisheries and Aquaculture (LGPA), modified April 2012.

Specific regulations released from LGPA, like:
o RAMA: Associated to environmental aspects, monitoring and correct practices to
operate in environmental terms.
o RESA: Associated to sanitary aspects, fallow period, diseases, mortalities
treatment, among others.
o Minimum operation: Establishes the minimum productive of licenses and the fallow
period.
o REPLA: Establishes a protection area in case of plagues appearance, such as
Alexandrium catenella

No impact on duration of current licenses.

Future production capacity will be impacted by the new law, and specifically by
the following:
o Gradual opening of regions XII, XI and X after 12 months, on the first
case, and after five years on the second and third cases.
o Regulations of zones, availability of areas suitable for aquaculture and
fallow periods will limit production capacity and growth rate until new
licenses can be approved and/or new areas opened.
o As from 2014, dormant operations may cause loss of license.
o Environmental conditions given by high density in some zones may
cause decreases of production limits.
o New specific regulations about maximum production density are
announced to be enacted in 2012.

34

6.5 Access to licenses - Canada

In Canada, the Provincial and Federal licenses can be assigned to a different operator
through a Government Assignment Process. The provision enables a company to transfer
the licenses to another company for reasons such as: moved processing to new area,
distance is too great and not feasible to operate, change in species etc. The process involves
First Nations consultation, and depending on the relationships between the parties this can
be a lengthy procedure.

Timelines vary from one year to several years to acquire licenses for a new farm. An estimate
of cost to acquire a new license/site can range from CAD 300,000 - 500,000. No licenses for
new farms have been issued since 2007.

35

6.6 The Atlantic salmon life/production cycle

Source: Marine Harvest

The total production cycle takes approximately 10-16 months in freshwater plus 14-24
months in sea water in total 24-40 months. In Chile, the cycle is slightly shorter as the sea
water temperatures are more optimal.

See the appendix for a more detailed illustration of the production cycle.
Spawn Brood - Parr - Smolt
Transfer to
sea
Growth phase
in sea
Secondary processing
Primary processing (to HOG)
1
4
-
2
4

m
o
n
t
h
s

1
0
-
1
6

m
o
n
t
h
s

36

6.6 The Atlantic salmon life/production cycle

Norway (3 generations)


In the autumn, the broodfish are stripped for eggs and the ova inlay happens between
November and March. The producer has the possibility to speed up the growth of the
juveniles with light manipulation to accelerate the smoltification process by up to 6 months.
The light manipulated juveniles are called S0s and the normal grown juveniles are called
S1s.

In Norway, smolt is mainly released into seawater twice a year. S0s are released in
autumn/spring within 12 months after ova inlay, and S1s in the autumn about 18 months
after ova inlay. A very small part of the production is produced as S1, which are only put to
sea 2 years after the ova inlay. The harvest is spread all around the year. In Norway, typical
harvest is the beginning of the year for S0s and second half of the year for S1s. During
summer, the supply to the market is significantly different to the rest of the year as harvest go
from S0s to S1s, and the large S0s and the small S1s dominate the supply.

After a site is harvested, the location is fallowed between 2 and 6 months before the next
generation is put to sea at the same location. Smolt may be released in the same location
with a two year cycle. In the example above, Generation 1 (G1) is put to Location 1 (L1), G2
put to L2, and then G3 is put in L1 again as the fish from G1 have been harvested and the
location has been fallowed.

Harvest volume is largest in the last quarter of the year as this is the period of best growth,
and because most of the S1s are harvested in this period. Some of the last S0s and some
early S1 could also be harvested in this period.

G1
G2
G3
L1
L2
L1

37

6.7 Production inputs

Eggs

There are several suppliers of eggs to the
industry. Aquagen AS, Fanad Fisheries Ltd,
Lakeland and Salmobreed AS are some of
the most significant by volume. Egg
suppliers can tailor their production to
demand by obtaining more or less fish for
breeding during the preceding season.
Production can easily be scaled. The egg
market is international.

Smolt

The majority of smolt are produced
in-house by vertically integrated salmon
farmers. This production is generally captive,
although a proportion may also be sold to
third parties. A smolt is produced over a 6-
12 months period from the eggs are fertilised
to a mature smolt with weight of 60-100
grams.

38

6.7 Production inputs

Source: Marine Harvest, Kontali Analyse, SSPO

Labour

In 2011, around 5 800 people in Norway were directly employed in aquaculture, of which
more than half was employed in salmon and trout production.

According to Scotland Salmon Producers Organisation (SSPO), over 2 100 people are
employed in salmon production in Scotland. The Scottish Government estimates that 6,200
jobs are reliant on the aquaculture industry.

Estimates on Canadian employment say that around 2 500 people are directly employed in
salmon farming industry.

In Chile, employment has been significantly reduced as a consequence of the ISA situation
that developed throughout 2008. Direct employment in Chilean aquaculture (incl. processing)
is estimated to around 18 000 people in 2011.

In Norway, both salaries and levels of automation are highest, while the opposite is the case
in Chile. Salaries in UK and Canada are somewhat lower than in Norway.

Electricity

Electricity is mainly used in the earliest and latest stage in the salmons life cycle. To produce
a good quality smolt, production normally takes place in tanks on land where the water is
temperature regulated and/or recirculated which requires energy (8-10% of smolt cost in
Norway). When the salmon is processed energy is consumed. However, this depends on the
level of automation (3-5% of harvest cost in Norway).

39

6.8 Factor influencing the pace of production

Sea Water Temperature

Source: Marine Harvest, racerocks.com

The sea water temperatures vary much throughout the year in all production regions. While
the production countries on the Northern hemisphere see low temperatures during the
beginning of the year and high temperatures in autumn varying with as much as 10
0
C, the
temperature in Chile is more stable varying between 10
0
C and 14
0
C. Chile has the highest
average temperature of 12
0
C, while Ireland has 11
0
C and the three other regions have an
average temperature of about 10
0
C.

As the salmon is a cold-blooded animal (ectotherm), the temperature plays an important role
for its growth rate. The optimal temperature range for Atlantic salmon is 8-14
0
C, illustrated by
the shaded area on the graph. Temperature is one of the most important natural competitive
advantages that Chile has compared to the other production regions as the production time
historically has been shorter by a few months.

With high seawater temperatures, disease risk increases, and with temperatures below 0
0
C
causes mass mortality. Both of which causes growth rate to fall.

40

7. Cost Dynamics
7.1 Economics of salmon farming

The salmon farming industry is capital intensive
and volatile. This is a result of a long production
cycle, a fragmented industry, market conditions
and a biological production process, which is
affected by many external factors.

Over time, production costs have been reduced
and productivity has increased as new technology
and new competence has been achieved. This is
believed to continue in the future as commercial
aquaculture still is a young industry.

Revenues

Reported revenues

Revenues are a gross figure; they can include invoiced freight from reference place (e.g.
FCA Oslo) to customer, and have discounts, commissions and credits deducted. Reported
revenues can also include revenues from trading activity, sales of by-products, insurance
compensation, gain/loss on sale of assets etc.

Price

Reported prices are normally stated in the terms of a specific reference price e.g. the
NOS/FHL price for Norway (FCA Oslo) and UB price for Chile (FCA Miami). Reference prices
are not reflecting freight, and other sales reducing items mentioned above. Reference prices
are for one specific product (FHL = per kg head on gutted fish packed fresh in a standard
box). Sales of other products (frozen products, fresh fillets and portions) will cause deviation
in the achieved prices vs. reference price. Reference prices are for superior quality fish, while
achieved prices are for a mix of qualities, including downgrades. Reference prices are spot
prices, while most companies will have a mix of spot and contract sales in their portfolio.

Volume

Reported volume can take many forms. Volume harvested = Fish harvested in a specific
period in a standardized term e.g. head on gutted (HOG) or whole fish equivalent (WFE)
the difference being gutting loss. Volume sold can be reported using different weight scales:
Kg sold in product weight
Kg sold converted to standard weight unit (HOG or WFE)
Volume sold could also include traded volume.

41

7.2 Production costs

The figures below illustrate the main cost components and their relative importance in the
farming of salmon in the three biggest regions. The cost level is chosen for illustration
purposes.

Norway (NOK) Canada (CAD) Scotland (GBP) Chile (USD)
Feed 11,24 2,16 1,39
2.00
Primary processing 2,30 0,52 0,25
0.06
Smolt 2,08 0,56 0,25
0.46
Salary 1,31 0,52 0,14
0.10
Maintenance 0,70 0,17 0,07
0.25
Well boat 0,92 0,20 0,16
0.25
Depreciation 0,62 0,25 0,10
0.12
Sales & Marketing 0,44 0,03 0,05
0.16
Mortality 0,47 0,12 0,01
0.04
Other 2,56 0,94 1,29
1.04
Total* 22,64 5,47 3,70
4.50

*HOG cost in box delivered at the processing plant including mortality

Cost elements

Feed: As in all protein production, feed makes up the largest share of the total cost. The
variation in costs between the countries is based on somewhat different inputs to the feed,
logistics and the feed conversion ratio.

Smolt: Smolt production is done in two different ways; either in lakes or in closed/re-
circulated systems in tanks on land. The smolt is produced in fresh water up to about 100g
when the salmon through its smoltification phase gets ready to be put in sea water. UK has
the highest costs as there has been low scale production in both land based systems and
tanks. Chile has used lakes for this production and has had cheap labour, while in Norway
there has been a transfer from production in lakes to large scale production in land-based
systems.

Salary: Salary level differs among the production regions but in general the salary cost is low
because labour cost is a minor part of the total cost as much of the production is automated
(e.g. feed blowers).

Well boat/processing: The cost of transportation of live fish, slaughtering, processing and
packing are all heavily dependent on volume, logistics and automation.

Other operational costs: Other costs include direct and indirect costs, administration,
insurance, etc.

42

7.3 Cost component mortality and disease

EBIT costs per kg decline with increasing harvest weight. If fish is harvested at a lower
weight than optimal caused by among other factors diseases, EBIT costs per kg will be
higher.

During the production cycle, some mortality will be observed. Under normal circumstances,
the highest mortality rate will be observed during the first 1-2 months after the smolt is put
into seawater, while subsequent stages of the production cycle normally has a lower mortality
rate.

Elevated mortality in later months of the cycle is normally related to outbreaks of disease or
predator attacks.

There is no strict standard for how to account for mortality in the books, and there is no
unified industry standard. Three alternative approaches are:
Charge all mortality to expense when it is observed
Capitalise all mortality (letting the surviving individuals carry the cost of dead
individuals in the balance sheet when harvested)
Only charge exceptional mortality to expense (mortality, which is higher than what is
expected under normal circumstances)

It is not possible to perform biological production without any mortality. By capitalizing the
mortality cost, the cost of harvested fish will therefore reflect the total cost for the biomass
that can be harvested from one production cycle.

43

7.4 Feed and feed ingredients


Growth intervals 0.1 0.2 kg 0.2 1 kg 1 2 kg 2 3 kg 3 4 kg 4 5 kg
Feed consume* 0.08 kg 0.75 kg 1.00 kg 1.05 kg 1.10 kg 1.20 kg
Time, months 2 4 4 3 2 2

*Estimates for Norway only typical S1 smolt

Historically the two most important ingredients in fish feed have been fish meal and fish oil.
The use of these two marine raw materials in feed production has been reduced and
replaced by agricultural commodities such as soy, sunflower, wheat, corn, beans, peas,
poultry by-products (Chile and Canada) and rape seed oil replacing fish oil. This substitution
is mainly done because of heavy constraints on availability of fish meal and fish oil.

Fish meal and other raw materials of animal origin have a more complete amino acid profile
compared to protein of vegetable origin and have generally a higher protein concentration. It
is therefore a big challenge to produce the knowledge required to replace fish meal 100%.

During the industrys early phases, salmon feed was moist (high water content) with high
levels of marine protein (60%) and low levels of fat/oil (10%). The industry then went through
a development of pellet feeds with focus on protein and fat content. A typical recipe in the
early nineties consisted of 45% protein, whereof most of it was marine protein, i.e. fish meal.
Today, the marine protein level is lower due to cost optimization and fish meal availability.
However, the most interesting development has been the increasingly higher inclusion of fat.
This has been possible through technological development and extruded feeds.

Due to market demands, legislation and different availability of raw materials, the ingredients
used in fish feed today are different from country to country, giving higher raw material
flexibility in certain regions as e.g. Chile and Canada. This will have an impact on the feed
price.

Feed and feeding strategies aim at growing a healthy fish fast at the lowest possible cost.
Standard feeds are designed to give the lowest possible production cost. Premium diets are
available in most countries and are being used in certain situations where extra growth rate is
profitable. Feeding control systems shall prevent feed waste and assure that the fish get
enough feed to grow to its potential. Normally the fastest growing fish show the lowest feed
conversion rate.
29 %
15 %
15 %
26 %
15 %
19 %
15 %
10 %
30 %
14 %
12 %
59 %
24 %
17 %
Development in use of ingredients in salmon feed receipts
Global 1990 Norway 2008 Chile 2008

44

7.5 Salmon feed producers

Source: Skretting annual report, EWOS annual report, BioMar

During the last decade, the salmonid feed industry has become very consolidated, and from
2008 there has essentially been three producers, which are all subsidiaries of listed
companies, controlling the majority of the output. These companies, BioMar (Schouw), Ewos
(Cermaq) and Skretting (Nutreco) are operating globally. Additionally, there are some
producers who are only present in their regional market.

One major issue in the salmon feed industry is the future supplies of the raw materials going
into feed (see next page).

The major cost elements when producing salmonid feed are the raw materials required and
production costs.

The feed producers have historically operated on cost-plus contracts, leaving the exposure of
raw material prices with the aquaculture companies.
Feed producers'
market share 1998
Skretting (44%)
EWOS (22%)
BioMar (12%)
NorAqua (9%)
Biomaster (4%)
Other (9%)
Feed producers'
market share 2008
Skretting (35%)
EWOS (34%)
BioMar 25%)
Other (6%)

45

7.6 Raw material market

Source: Marine Harvest, Holtermann

Fish oil: Price in 2012 is about 1400 USD. Since 2009 fish oil prices has steadily increased
and we expect fish oil prices to become uncorrelated with vegetable oil prices in the future.

Rape seed oil: Rape seed oil prices have very much the same price trend as fish oil. As
there is an increasing demand for bio diesel, there will be continued pressure on price,
including other types of vegetable oil.

Fish meal: In the last year there has been a decreasing trend in the price, but this is not
expected to continue.

Soy: After having seen the soy prices climb to the highest level in 34 years in mid-2008, the
prices fell slightly and has remained stable the last couple of years. The main reason for
2008s price increase was because less soy was planted due to a shift from soy to corn in
many regions, and a high demand for vegetable oil in general. Corn is planted in higher
volume due to increased demand for ethanol produced from corn, i.e. former soy areas are
used for corn production.

Vegetable protein: Soy and corn have traditionally been very important vegetable protein
sources in fish feed. As a consequence of less planting of soy and more corn for energy
purposes, the price for these raw materials increases. Parallel to this there has been an
increase in genetic modified (GM) production of soy and corn. To be able to get non-GM
production, a premium has been put on price, i.e. non -GM products are more expensive than
GM products.

Wheat: Wheat has been rather stable since late 2010.
-
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
U
S
D
/
t
o
n
n
e
s

Fish meal
Soy meal
Wheat
Rapeseed oil
Fish oil

46

7.7 Price, cost and EBIT development (Norway)


Due to supply growth being higher than the structural growth in demand in the period 1993-
2007 there was a falling trend of the price of salmon. In recent years, this trend has been
broken due to the collapse of the Chilean industry, combined with effects of consolidation in
the industry.

As a result of cost benefits of industrialisation, consolidation and economies of scale,
combined with improvements in the regulatory framework and fish health mitigation, the cost
curve has also had a falling trend.

The average EBIT per kg for the Norwegian industry has hence been positive with the
exception of a few shorter periods, and NOK 4.12 per kg in nominal terms.

-10,00
-5,00
0,00
5,00
10,00
15,00
20,00
25,00
30,00
35,00
40,00
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
EBIT/kg Price/kg Cost/kg

47

7.8 Salmon farming is a capital intensive industry

Cost of building biomass


For illustration purposes, the farming process has been divided into three stages of 12
months. The first 12 months is production from egg to finished smolt. After this, 24 months of
on-growing in sea follows. After the on-growing phase is over, harvest takes place
immediately thereafter (illustrated as Month 37). In a steady state there will at all times be
three different generations at different stages in their life cycle.

At the point of harvest there have been incurred costs to produce the fish for up to 36
months, where some costs were incurred to produce the smolt two years ago, further costs
incurred to grow the fish in seawater and some costs incurred related to harvest (Month
37). Sales price should cover the costs and provide a profit margin (represented by the
green rectangle).

Cash cost in the period when the fish is harvested is not large compared to sales income,
creating a high net cash flow. If production going forward (next generations) follows the same
pattern, most of the cash flow will be reinvested into salmon at various growth stages. If the
company wishes to grow its future output, the following generations need to be larger
requiring even more of the cash flow to be reinvested in working capital.

This is a rolling process and requires substantial amounts of working capital to be tied up,
both in a steady state and especially when increasing production.

48

7.9 Capital needs when building biomass


The illustration above shows how capital needs develop when one is building
production/biomass from scratch. In phase 1, there is only one generation (G) of fish
produced and the capital needs is the production cost of the fish. In phase 2, the next
generation is also put into production, while the on-growing of G1 continues, rapidly
increasing the capital invested. In phase 3, G1 has come to its last stage, G2 is in its on-
growing phase and G3 has begun to increase its cost base.

At the end of phase 3 the harvest starts for G1, reducing the capital bound but the next
generations are building up their cost base. If each generation is equally large and everything
else is in a steady state, the capital needed would have peaked at the end of phase 3. With a
growing production, the capital needed will also increase after phase 3 as long as the next
generation is larger than the previous (if not, capital base is reduced). We see that salmon
farming is a capital intensive industry

49

7.10 Accounting principles for biological assets

Biological assets are measured at fair value less cost to sell, unless the fair value cannot be
measured reliably.

Effective markets for sale of live fish do not exist so the valuation of live fish implies
establishment of an estimated fair value of the fish in a hypothetical market. The calculation
of the estimated fair value is based on market prices for harvested fish and adjusted for
estimated differences. The prices are reduced for harvesting costs and freight costs to
market, to arrive at a net value back to farm. The valuation reflects the expected quality
grading and size distribution. The change in estimated fair value is recognised in profit or loss
on a continuous basis, and is classified separately (not included in the cost of the harvested
biomass). On harvest, the fair value adjustment is reversed on the same line.

The biomass valuation includes the full estimated fair value of fish at and above harvest size
(4 kg LW). For fish between 1 kg and 4 kg LW a relative share of future value is included.
The best fair value estimate for fish below 1 kg, smolt and broodstock is considered to be
accumulated cost. The valuation is completed for each business unit and is based on
biomass in sea for each sea water site. The fair value reflects the expected market price. The
market price is derived from a variety of sources. Normally a combination of achieved prices
last month and the most recent contract entered into. For Marine Harvest Norway, quoted
forward prices (Fish Pool) are also included in the calculation.

Operational EBIT

Operational EBIT and other operational results are reported based on the realised costs of
harvested salmon and do not include the fair value adjustments on biomass.

50

7.11 Investments and payback time for new entries (Norway)

Assumptions

Normal site consisting of 4 licenses:

Equipment investment NOK 30-35m
Number of licenses 4
Licence cost (second hand market) NOK 120-200m (~NOK 30-50m per licence)
Output per generation: ~4000 tonnes HOG
Number of smolt released: 1m

Smolt cost per unit: NOK 8
Feed price per kg: NOK 8.40
Economic feed conversion ratio (FCR): 1.17 (to live weight)
Conversion rate from Live Weight to HOG: 0.83
Harvest and processing incl. well boat cost per kg (HOG): NOK 3

Average harvest weight (HOG): 4.5kg
Mortality in sea: 10%

Sales price: NOK 27

Source: Marine Harvest, Kontali Analyse

For new volume capacity to be established there are many regulations to fulfil.

In this model, we have used only one site for simplification purpose and because we are
looking at a new company entering the industry. Most companies use several sites at the
same time, which enables economies of scale and makes the production more flexible and
often less costly.

To simplify, smolt is bought externally. Smolt is usually less costly to produce internally, but
this depends on production volume.

The performance of the fish is affected by numerous factors as feeding regime, sea water
temperature, diseases, oxygen level in water, smolt quality etc.

Sales price chosen is the average sales price from Norway the last decade.

51

7.11 Investments and payback time for new entries (Norway)

Results


Because of the simplifications in the model and low, non-optimal production regime,
production cost is higher than industry average. Due to high entry barriers in terms of capital
needs and falling production costs with volume, new companies in salmon production will
experience higher average production costs. During the production of each harvest the
working capital needed at this farm, given the assumptions, would be peaking at MNOK 75
(given that the whole harvest is harvested at the same time).

With a sales price at the historic average level, payback time for the original investments
would be 12-13 years. This result is very sensitive to sales price and economic feed
conversion ratio (FCR), as the figure above shows.

Sales price of NOK 27 is chosen as this is close to the historical average price in Norway.
FCR at 1.17 is achievable on average, while lower economic FCR is possible for parts of
production and a target for the industry.

52

8. Salmon diseases, mitigation and R&D
8.1 Salmon disease prevention and treatment

Minimising disease risk and maintaining healthy fish stocks is primarily achieved through
good husbandry and health management practices and policies. Such practices, in addition,
reduce exposure to pathogens, control the potential spread of infectious disease and
decrease stress. The success of health management practices has been demonstrated on
many occasions and have contributed to an overall improvement in the health of farmed
salmonids.

Fish health management plans, veterinary health plans, bio security plans, disease mitigation
plans, contingency plans, disinfection procedures, surveillance schemes as well as
coordinated and synchronised zone/area management approaches all support healthy stocks
with emphasis on disease prevention.

For the majority of salmonid diseases, prevention is achieved through vaccination at an early
stage in production. Vaccines are now widely used commercially to combat the majority of
salmonid pathogens. With the introduction of vaccines a considerable number of bacterial
diseases have been effectively controlled, with the additional benefit that the quantity of
antibiotic prescribed in the industry has been minimised.

Despite such disease prevention approaches, many diseases are recognised as conditions
that can exert an impact on production if they are not controlled through the application of
good husbandry and management. In some situations medicinal treatment is still required to
maintain control and even the best managed farms require using medicines from time to
time. For several of the viral diseases, no effective vaccines are available and no effective
cure exists.

53

8.2 Most important disease risks

Infectious Pancreatic Necrosis (IPN)
IPN is caused by the IPN virus and is widely reported. It is a highly contagious disease that
can cause significant mortality. IPN can affect Atlantic salmon fry, smolts and larger fish post-
transfer. Available vaccines reduce IPN-losses to some extent, but good results can also be
obtained by optimizing husbandry and biosecurity measures. In addition, promising results
are now seen by use of genetic selection of families less susceptible for the disease (QTL-
based genetic selection).

Pancreas Disease (PD)
PD is caused by the Salmonid Alphavirus and is present in Europe. It is a contagious disease
that causes reduced appetite, muscle and pancreas lesions, lethargy and elevated mortality.
PD affects Atlantic salmon in seawater and control is achieved mainly by management and
mitigation practices. Vaccination is currently in use in areas where PD is representing a risk
and gives some degree of protection.

Heart and Skeletal Muscle Inflammation (HSMI)
HSMI, associated with Piscine reovirus (PRV), is currently reported in Norway, and PRV is
found in other salmon producing countries. Symptoms of HSMI are reduced appetite,
abnormal behaviour and in most cases low to moderate mortality. HSMI generally affects fish
the first year in seawater and control is achieved mainly by good husbandry and
management practices.

Infectious Salmon Anaemia (ISA)
ISA is caused by the ISA virus and is widely reported. It is a highly contagious disease that
causes lethargy, anaemia and may lead to significant mortality in seawater. Control is
achieved through culling / harvesting of affected fish in addition to other biosecurity and
mitigation measures. Vaccines are available and in use where ISA is regarded to represent a
significant risk.

Salmonid Rickettsial Septicaemia (SRS)
SRS is caused by an intracellular bacterium. It occurs mainly in Chile but is also observed, to
a lesser extent, in Norway and the UK. It is a contagious seawater disease that causes
lethargy, anorexia and elevated mortality. SRS has been controlled mainly by medicinal
intervention (antibiotics), however commercial vaccines are available and in use in the
Chilean industry.

Gill Disease (GD)
GD is a general term used to describe gill pathology occurring in seawater. The changes may
be caused by different infectious agents; amoeba, virus or bacteria, as well as environmental
factors including algae or jelly-fish blooms. Little is known about the cause of many of the gill
conditions and to what extent infectious or environmental factors are primary or secondary
causes of disease. Gill damage can lead to respiratory distress and significant mortality can
occur. Currently there is no effective cure.
Sea lice
Sea lice, of which there are several species, are natural occurring seawater parasites. They
infect the salmon skin and if not controlled they can cause lesions, secondary infection and
mortality. Sea lice are controlled through good husbandry and management practices and the
use of pharmaceutical products, cleaner fish (different wrasse species, eating parasites off
the salmon skin), and hydrogen peroxide baths (well boats or enclosed cages).

54

8.3 Fish health and vaccination (Norway)

Vaccination and use of Antibiotics (Norway)

Source: Kontali Analyse, Norsk medisinaldepot, Folkehelseinstituttet

Associated with the increase in production of Atlantic salmon in Norway in the 1980s was an
increase in mortality and the incidence of disease outbreaks. In the absence of
effective vaccines the use of antibiotics increased and reached a maximum of almost 50
tonnes in 1987. With the introduction of effective vaccines against the bacterial diseases
Vibriosis, Cold Water Vibriosis and Furunculosis, the quantities of antibiotic used in the
industry declined significantly to less than 1.4 tonnes by 1994 and has since then continued
to be very low. These developments, along with the introduction of biosecurity and mitigation
measures against ISA allowed for further expansion of the industry and respective production
volumes.

During the last two decades there has been a general stabilisation of mortality in Norway,
Scotland and Canada, which has been achieved principally through good husbandry,
management practices and vaccination. However, losses during seawater are still too high in
Norway and Ireland, and this area has gained increased focus the last years. A
positive development has been observed in Chile after rebuilding the industry after the ISA-
epidemic.
-
100
200
300
400
500
600
700
800
900
1 000
0
10
20
30
40
50
60
'
0
0
0

t
o
n
n
e
s

H
O
G

T
o
n
n
e
s

a
c
t
i
v
e

s
u
b
s
t
.

Antibiotics use HQ - Atlantic Salmon

55

8.4 Research and development areas

Disease
Developing better tools for prevention and control of listed diseases
Vaccine developments/ improvements
Develop new and optimize use of current pharmaceuticals for lice control
Non-pharmaceutical technologies for sea lice control, including farming of cleaner fish

Environment
Environmental impact of aquaculture
Capacity of coastal environment to assimilate discharges from aquaculture
Interactions between cultivated and wild species
Production of sterile salmon

Genetics and immunology
Tools for health and performance monitoring of Atlantic salmon
Breeding and selection for disease resistant stock

Welfare
Optimise slaughter methods
Physiological & behavioural measures of the welfare of farmed fish in relation to
stocking densities, environmental & husbandry factors

Feed & nutrition
Fish oil and fish meal substitution in salmon diets maintaining fish health, performance
and quality.
Functional diets for improved fish health
Bone health and role of nutrition

Product quality
Measures to reduce prevalence of melanin (black spots) in the fish flesh
Identify disposing factors and measures to reduce risk of soft flesh and gaping

Technology
Most of the technology used in aquaculture is global and Norway has been a leader in the
development of new technology in modern aquaculture. However, the technology and
knowledge has spread fast. For instance floating cages, which are still used, was developed
in Norway and exported to Chile by Norwegian players. Another example is Aquagroup
supplying aquaculture equipment and software all over the world.

According to Zacco (Norwegian patenting office), the patenting intensity in the salmon
farming industry has grown rapidly the last two decades. R&D is done in several areas, but
the most important development has been in feed and vaccines, done by large global
players. In this industry the majority of producers are small and have neither had the capital
nor the competence to undertake and supervise major R&D activities. This is expected to
change as the consolidation in the industry continues.

Smolt/ Ongrowing production and processing
The technology used in these stages can be bought off the shelf. Very few patents are
granted. Technology is becoming increasingly advanced to operate.

56

9. Secondary processing (VAP)

In salmon processing we divide between primary and secondary processing.

Primary processing is slaughtering and gutting. This is the point in the value chain standard
price indexes for farmed salmon are related to.

Secondary processing is filleting, fillet trimming, portioning, different cuttings like choplets,
smoking or making ready meal or packing with Modified Atmosphere (MAP).

The products that are secondary processed are called value-added products (VAP).

57

Others
19%
Shellfish
and
mussels
15%
Fish
66%
9.1 European value-added processing (VAP) industry

A total value of > EUR 25 billion

Employees > 135,000

Extremely fragmented more than 4,000
companies

About 50% of all companies have less than 20
employees

Traditionally the EBIT-margins have been between 2% and 5%

The average company employs 33 people and has a turnover of EUR 4.2 million

Source: Marine Harvest, Intrafish, EU

The seafood industry in Europe is extremely fragmented with more than 4,000 players. Most
of the companies are fairly small, but there are also several companies of significant size
involved in the secondary processing industry: Marine Harvest, Icelandic Group, The
Seafood Company, Deutche See, Royal Greenland, Labeyrie, Lery Seafood, and Morpol.

Most of the largest players are basing their processing on Atlantic salmon, producing smoked
salmon, portions or ready meals with different packing as vacuum or modified atmosphere
(MAP).

Consumers are willing to pay for quality and value-added. This means that we are expecting
to see an increase in demand for products such as ready meals and ready-to-cook, together
with a packing trend towards MAP as this maintain the freshness of the product longer.

58

9.2 Market segment in the EU (2009)


In the EU in 2009 more than half of the Atlantic salmon went to retailers, while 45% went to
hotels, restaurants and catering (HORECA).

Of whole salmon and salmon fillets almost two thirds were sold as fresh fish and about one
third as frozen.

In the EU, salmon fillets and smoked salmon have an equal market share of 32% each, while
whole fish has about 19%. In this graph, other VAP consists of all value added processed
products, except smoked salmon which is represented separately.

55%
45%
Retail vs. Horeca
Retail Horeca
61%
39%
Fresh vs. frozen
Fresh Frozen
19%
32%
32%
16%
Different products
Whole Fillet Smoked Other VAP

59

9.3 The European market for smoked salmon (2011)

Market by country


The most common secondary processed product based on Atlantic salmon, is smoked
salmon. The European market for this product was 150,000 tonnes product weight (PW) in
2011, where France and Germany were the largest markets. The amount of raw material
needed for this production was around 250,000 tonnes HOG, up 8% since 2009.

European smoked salmon producers

Estimated Annual Raw Material - Tonnes HOG
60 - 80 000 20 - 40 000 10 - 20 000 5 - 10 000
Morpol (PL) Labeyrie (FR-UK) Norvelita (LT) Xantelar (ES)
Youngs (UK) Marine Harvest (FR) Friedrichs (DE)
Mer Alliance (FR) Ahumados Domingues (ES)
Suempol (PL) KB Rgeri (DK)
Voppen (NL) Neptune Intnl. (DE)
Lery (NL-SE-NO)

The ten largest producers of smoked salmon in Europe have a joint market share of about
55-60%. The production is mainly done in Poland, France, UK, Baltic states, Germany and
the Netherlands.

After the acquisition of the German company Laschinger, Morpol is the largest producer of
smoked salmon in Europe. Morpol is based in Poland and is selling most of its production to
the German market.

Labeyrie is the second largest and sells most of its products to France, but are also found in
UK, Spain, Italy and Belgium.

Marine Harvest has its smoked salmon production in France (Kritsen) and in Belgium (La
Couronne). Marine Harvest sells its smoked salmon in France, Italy and Belgium.

0% 5% 10% 15% 20% 25%
Other
Scandinavia
Spain
Be/Ne/Lux
Italy
Germany
UK
France

60

Appendix

In the appendix there is an explanation of key words, and you will find key information about
the Marine Harvest group such as key financial numbers, the companys history together with
information about our operations upstream and downstream.

61

Appendix: Weight conversion ratios and key words

Atlantic salmon Trout Coho
Live fish 119 %
Loss of blood/starving 8 %
Harvest weight 111 % 114 % 111 %
Round bled fish (wfe)
Offal 11 % 14 % 11 %
Gutted fish, approx. (HOG) 100 % 100 % 100 %
Head, approx. 9 % 9 % 14 %
Head off, gutted 91 % 91 % 86 %
Fillet skin on 67 - 77 % (C-trim approx. 70%)
Fillet skin off 56 - 68 %


Net weight: Weight of a product at any stage (HOG, fillet, portions). Only the
weight of the fish part of the product (excl. ice or packaging), but
incl. other ingredients in VAP

Primary processing: Whole fish HOG/GW

Secondary processing: Any value added processing beyond HOG/HG

Biomass: The total weight of living fish, where number of fish is multiplied
with an average weight

Ensilage: Salmon waste from processing added acid

FCR = IB feed stock + feed purchase UB feed stock
Kg produced weight on smolt release

Price FOB Seattle (whole fish from Canada)
Notifications FOB Miami (fillets from Chile)
FCA Oslo

62

Appendix: Some historic acquisitions and divestments

Year Norway
1999 Hydro Seafoods - Sold from Norsk Hydro to Nutreco Aquaculture
2001 Gjlaks - Sold to PanFish
2001 Vest Laks - Sold to Austevoll Havfiske
2001 Torris Products - Sold from Torris to Seafarm Invest
2001 Gjlanger Havbruk - Sold to Aqua Farms
2001 Alf Lone - Sold to Sjtroll
2001 Sandvoll Havbruk - Sold to Nutreco Aquaculture
2001 Fosen Edelfisk - Sold to Salmar
2001 Langsteinfisk - Sold to Salmar
2001 Tveit Grd - Sold to Alsaker Fjordbruk
2001 Petter Laks - Sold to Senja Sjfarm
2001 Krkyfisk - Sold to Salmar
2002 Amulaks - Sold to Follalaks
2002 Kvamsdal Fiskeoppdrett - Sold to Rong Laks
2002 Matland Fisk - Sold to Bolaks
2002 Sanden Fiskeoppdrett - Sold to Aqua Farms
2002 rsnes Fiskeoppdrett - Sold to Aqua Farms
2002 Toftysund Laks - Sold to Alsaker Fjordbruk
2003 Nye Midnor - Sold from Sparebank1 MidtNorge to Lery Seafood Group
2003 Ishavslaks - Sold to Aurora to Volden Group
2003 Loden Laks - Sold to Grieg Seafood
2003 Finnmark Seafood - Sold to Follalaks
2003 Ullsfjord Fisk - Sold to Nordlaks
2003 Henningsvrfisk - Sold to Nordlaks
2004 Flatanger Akva - Sold to Salmar
2004 Naustdal Fiskefarm/Bremanger Fiskefarm - Sold to Firda Sjfarm
2004 Fjordfisk - Sold to Firda Sjfarm
2004 Snekvik Salmon - Sold to Lery Seafood Group
2004 Aure Havbruk / M. Ulfsnes - Sold from Sjfor to Salmar
2005 Follalaks - Sold to Cermaq
2005 Aqua Farms - Sold to PanFish
2005
Aurora Salmon (Part of company) - Sold from DNB Nor to Lery Seafood
Group
2005 Marine Harvest Bolga - Sold to Seafarm Invest
2005 Aurora Salmon (Part of company) - Sold from DNB Nor to Polarlaks
2005 Sjlaks - Sold from Marine Farms to Northern Lights Salmon
2005 Bolstad Fjordbruk - Sold to Haugland Group
2005 Skjervyfisk - Sold to Nordlaks
2006 Fossen AS - Sold to Lery Seafood Group
2006 Marine Harvest N.V. - Acquired by Pan Fish ASA
2006 Fjord Seafood ASA. - Acquired by Pan Fish ASA
2006 Marine Harvest Finnmark - Sold from Marine Harvest to Volden Group
2006 Troika Seafarms/North Salmon - Sold to Villa Gruppen
2006 Aakvik - Sold to Hydrotech
2006 Hydrotech - Sold to Lery Seafood Group
2006 Senja Sjfarm - Sold to Salmar ASA
2006 Halsa Fiskeoppdrett - Sold to Salmar ASA
2006 Langfjordlaks - Sold to Mainstream
2006 Polarlaks - Sold to Mainstream
2007 Veststar - Sold to Lery Seafood Group
2007 Volden Group - Sold to Grieg Seafood
2007 Artic Seafood Troms - Sold to Salmar ASA
2007 Arctic Seafood - Sold to Mainstream
2007 Fiskekultur - Sold to Haugland Group
2007 UFO Laks - Sold to Haugland Group
2007 Anton Misund - Sold to Rauma Gruppen
2007 Mico Fiskeoppdrett - Sold to Rauma Gruppen
2008 Hamneidet - Sold to Eidsfjord Sjfarm
2008 Misundfisk - Sold to Lery Seafood Group
2008 Henden Fiskeoppdrett - Sold to Salmar ASA
2008 AS Tri - Sold to Norway Royal Salmon (NRS)
2008 Fey Fiskeopprett - Sold to Norway Royal Salmon
2008 Salmo Arctica - Sold to Norway Royal Salmon
2008 my Fiskeoppdrett - Sold to Norway Royal Salmon
2008 Nor Seafood - Sold to Norway Royal Salmon
2008 Altafjord Laks - Sold to Norway Royal Salmon
2008 Lery Seafood Group - Purchased by Austevoll Seafood
2009 Skjrgrdsfisk - Sold to Lingalaks
2009 Brilliant Fiskeoppdrett - Sold to Norway Royal Salmon
2009 Polarlaks II - Sold to Nova Sea
2009 Fjordfarm - Sold to Blom Fiskeoppdrett
2009 Fyllingsnes Fisk - Sold to Eide Fjordbruk
2009 Salaks merged with Rlaks
2009 65 new licenses granted
2010 Espevr Fiskeoppdrett - Sold to Bremnes Fryseri
2010 AL Nordsj - Sold to Alsaker Fjordbruk
2010 Nord Senja Fiskeindustri - Sold to Norway Royal Salmon
2010 Mary Salmon - Sold to Blom Fiskeoppdrett
2010 Fjord Drift - Sold to Tombre Fiskeanlegg
2010 Hennco Laks - Sold to Haugland Group
2010 Raumagruppen - Sold to Salmar
2010 Stettefisk / Marius Eikremsvik - Sold to Salmar
2010 Lund Fiskeoppdrett - Sold to Vikna Sjfarm (Salmonor)
2011 R. Lernes - Sold to Msval Fiskeoppdrett
2011 Erfjord Stamfisk - Sold to Grieg Seafood
2011 Jkelfjord Laks - Sold to Morpol
2011 Krifo Havbruk - Sold to Salmar
2011 Straume Fiskeoppdrett - Sold to Marine Harvest Norway
2011 Bringsvor Laks - Sold to Salmar
2011 Nordfjord Havbruk - Changed name to Nordfjord Laks
2011 Villa Miljlaks - Sold to Salmar
2011
Karma Havbruk - Sold to E. Karstensen Fiskeoppdrett (50 %)
and Mar Havbruk (50 %)
2012 Skottneslaks - Sold to Eidsfjord Laks
2012 Villa Arctic - 10 licenses, etc. sold to Salmar
2012 Salmon Brands - Sold to Bremnes Fryseri
2012 Pundslett Laks - Sold to Nordlaks Holding

63

Appendix: Some historic acquisitions and divestments

Year UK
1996 Shetland Salmon products - Sold to HSF GSP
1996 Straithaird Salmon to MH
1996 Gigha, Mainland, Tayinlaoan, Mull Salmon - All sold to Aquascot
1997 Summer Isles Salmon - Sold to HSF GSP
1997 Atlantic West - Sold to West Minch
1998 Marine Harvest Scotland - Sold from BP Nutrition ?? to Nutreco
1998 Gaelic Seafood UK - Sold to Stolt Seafarms
1998 Mainland Salmon - Sold to Aquascot
1999
Hydro Seafood GSP - Initially sold to Nutreco as part of Hydro Seafood
deal
1999 Joseph Johnston & Sons - Sold to Loch Duart
2000 Aquascot Farming - Sold from Aquascot to Cermaq
2000 Shetland Norse - Sold to EWOS
2000
Hydro Seafood GSP - Sold to Norskott Havbruk (Salmar & Lery
Seafood Group) from Nutreco
2001 Laschinger UK - Sold to Hjaltland
2001 Wisco - Sold to Fjord Seafood
2002 Wester Sound / Hoganess - Sold to Lakeland Marine
2004 Ardvar Salmon - Sold to Loch Duart
2004 Hennover Salmon - Sold to Johnson Seafarms Ltd.
2004 Bressay Salmon - Sold to Foraness Fish (from adm. Receivership)
2004 Johnson Seafarms sold to city investors
2005 Unst Salmon Company - Sold from Biomar to Marine Farms
2005 Kinloch Damph - Sold to Scottish Seafarms
2005 Murray Seafood Ltd. - Sold from Austevoll Havfiske to PanFish
2005 Corrie Mohr - Sold to PanFish
2006 Wester Ross Salmon - MBO
2006 Hjaltland Seafarm - Sold to Grieg Seafood ASA
2006 Orkney Seafarms - Sold to Scottish Seafarms
2007 Lighthouse Caledonia - Spin-off from Marine Harvest
2010 Northern Aquaculture Ltd - Sold to Grieg Seafood
2010 Lighthouse Caledonia - changed name to Scottish Salmon Company
2010 West Minch Salmon - Sold to Scottish Salmon Company
2010 Meridian Salmon Group - Sold to Morpol
2011 Skelda Salmon Farms Limited - Sold to Grieg Seafood
2011 Duncan Salmon Limited - Sold to Grieg Seafood

Year Chile
1999 Chisal - Sold to Salmones Multiexport
2000 Salmo America - Sold to Fjord Seafood
2000 Salmones Tecmar - Sold to Fjord Seafood
2000 Salmones Mainstream - Sold to Cermaq
2001 Pesquera Eicosal - Sold to Stolt Nielsen
2003 Marine Farms - Sold to Salmones Mainstream
2004 Salmones Andes - Sold to Salmones Mainstream
2004 Stolt Seafarm - Merged with Marine Harvest
2004 Pesquera Chillehue - Sold to GM Tornegaleones
2005 Aguas Claras - Sold to Acua Chile
2005 Salmones Chilo - Sold to Aqua Chile
2005 Robinson Crusoe - Sold to Aqua Chile
2006 GM Tornegaleones - change name to Marine Farm GMT
2006 Merger Pan Fish - Marine Harvest - Fjord Seafood
2007 Pacific Star - Sold to Andr Navarro
2007 Salmones Cupquelan - Sold to Cooke Aqua
2009 Patagonia Salmon Farm - Sold to Marine Farm GMT
2010 Camanchaca (salmon division) - Sold to Luksic Group
2011 Salmones Humboldt - Sold to Mitsubishi
2011 Pesquera Itata+Pesquero El Golfo - merged into Blumar
2011 Landcatch Chile Sold to Australis Mar
Year North America
1989 Cale Bay Hatchery - Sold to Kelly Cove Salmon
1994
Anchor Seafarms Ltd., Saga Seafarms Ltd., 387106 British Columbia
Ltd., and United hatcheries merged into Omega Salmon Group
(PanFish)
1997 ScanAm / NorAm - Sold to Pan Fish
2001 Scandic - Sold to Grieg Seafoods
2004 Stolt Sea Farm - merged with Marine Harvest
2004 Atlantic salmon of Maine (Fjord Seafood)- Sold to Cooke Aquaculture
2004 Golden Sea Products (Pan Fish) - Sold to Smokey Foods
2005 Heritage (East) - Sold to Cooke Aqua
2005 Heritage (West) - Sold to EWOS/Mainstream
2006 Marine Harvest - Sold to Pan Fish
2007 Target Marine - Sold to Grieg Seafoods
2007 Shur-Gain (feed plant in Truro)- Sold to Cooke Aqua culture
2008 Smokey Foods - Sold to Icicle Seafoods
2011
Vernon Watkins' Salmon Farming (NFL - Canada East) -
Sold to Cooke Aquaculture
2012
Ocean Legacy/Atlantic Sea Smolt (NS - Canada East) -
Sold to Loch Duart

In Norway there has been countless mergers between companies the last decade. The list
above only shows some of the larger ones in transaction value. In Scotland the consolidation
has also been very strong. In Chile, there has been limited transaction activity over the last
two years. However, several companies have been listed on the Santiago Stock Exchange.
Canadas industry has been extensively consolidated with a few large players and some
small companies.

64

80%
20%
1970
59%
16%
20%
5%
1990
1%
80%
7%
12%
2010E
Hardened edible
Aquafeed
Industrial
Refined edible
48,4 %
50,1 %
1,5 %
1970
10,0 %
49,8 %
36,1 %
4,1 %
1990
58,8 % 9,1 %
30,9 %
1,2 %
2010E
Aquaculture
Chicken
Pig
Other
Appendix: Marine raw materials in salmon feed

Availability

A major challenge for the fast growing global fish farming industry is to secure adequate
supply of feed raw materials at acceptable prices. In salmon feed, fish meal and fish oil have
traditionally been the main ingredients, but due to reduced availability and increased prices,
substitution with cheaper and sustainable non-marine raw materials have become common
practice. Although this trend started 20 years ago, the biggest changes in feed composition
have been introduced during the past 7-8 years. Fish meal protein is being substituted with
plant proteins, such as soya concentrates and sunflower meal or with poultry by-products*,
such as feather meal. Fish meal levels in some commercial feeds are now as low as 7-8%
(was 50-60% 15 years ago) and nutritionists believe that there is room for further reduction.
At these low levels salmon farming is a net producer of marine protein, in others words more
fish protein is produced that what is used to make the feed. The level of fish oil substitution
varies from region to region, but in the range of 50-70% (was 0% 15 years ago) of the oil in
salmon diets now comes from plant sources, mainly rape/canola or poultry by-products*.
Substitution of marine raw materials has not been found to have any negative effect on
growth, susceptibility to disease or quality of the fish.

Over the last 50 years the use of fish meal and fish oil has changed dramatically, with
aquaculture now being the main consumer (see graphs). Consumption by the industry
making refined edible products (omega-3 capsules, etc.) for the health food market is
growing and was around 12% in 2010.

(* Not used in Europe)

Changing use of fish oil

Changing use of fishmeal

65

Appendix: Sustainability of fish feed

Fish meal was originally a by-product from fish oil production at the time when fish oil was
cheap oil for hardening fat (margarine production). This situation has changed and both fish
meal and fish oil are moving from being bulk raw materials to speciality raw materials.

There are considerable environmental challenges related to the use of raw materials derived
from wild fish. A reduction in feed fisheries in the coming years is therefore not unlikely. The
global catches of wild fish in the oceans are relatively stable, at around 90 million tonnes, and
about one third of this is currently converted to fish meal and fish oil. During the last 30 years
fish meal production has varied between 5 and 7 million tonnes, while fish oil is stable around
1 million tonnes. Fish oil is a limited resource and due to its high content of healthy omega -3
fatty acids, more of the fish oil now goes directly to human nutrition. Competition for this
valuable raw material is therefore increasing and the omega-3 market today takes around
150.000 out of the 6-700.000 tonnes of fish oil that satisfies the sustainability and quality
requirements for salmon feed and the omega-3 market. Pelagic fish caught off the coast of
Peru and Chile and in the North East Atlantic are the main stocks used for fish meal and fish
oil. Peruvian anchovy is the biggest of these fisheries.

According to the UN's FAO, 90% of the fish used for fish meal and oil, is presently
unmarketable in large quantities as human food. The reason for this is that some of the
species are either unknown to people or unpalatable, or that the fish in question are too small
or turn rancid too quickly for economic storage and subsequent processing. Although the
FAO encourages using more fish directly to human consumption, they are of the opinion that
it is more efficient, in a protein-hungry world, to harvest the unmarketable species for feeding
to animals, subsequently consumed by man, than to not harvest the fish at all.

Around 24% (IFFO 2009) of the global fish meal production is based on trimmings and
discards from processing of food fish. This proportion has the potential to grow if more fish in
the future goes directly to human consumption and more efficient collection systems/logistics
for trimmings and discards are established.

According to UN, 7 million tonnes of wild catch are destroyed/discarded as non-commercial
harvest annually by commercial fisheries. This volume could have been converted into an
annual fish oil volume of 0.5 million ton, i.e. close to 80% of the tonnage used for salmon and
trout farming (2010).

Salmon are superior to poultry and pork in converting fish meal to meat. This is due to
significantly better FCR and protein retention. Salmon are cold-blooded and therefore use
hardly any energy to maintain body temperature. Also in an aquatic environment, less energy
is used for movement than on land.

The dependency on wild fish in salmon feed has been significantly reduced over the last 10 -
15 years due to changes in recipes. A recent report from Nofima (Srensen et al., 2011)
shows that the average Norwegian salmon diet in 2000 contained 37% fish meal and 31%
fish oil and that it had come down to 25% and 17% respectively in 2010. The downward trend
in the use of marine ingredients continues and with the ability of Atlantic salmon to utilise
alternative feed ingredients, lack of feed raw materials should not be a threat to the growth of
the industry. However, there will be increased competition for the best raw materials and feed
prices may therefore be affected.

66

Appendix: Atlantic salmon production cycle

67

Appendix: Marine Harvest history

The Marine Harvest Group was formally established on 29 December 2006 after a merger
between the two Norwegian companies Pan Fish ASA and Fjord Seafood ASA and the Dutch
company Marine Harvest N.V.

The Marine Harvest Group is the dominant leader within farming of Atlantic salmon. In 2011
the output was 344,000 tonnes HOG, which made out 24% of the industry output.

The groups production is located in all the major production regions in the world; Norway,
Chile, Canada, Scotland, Ireland and the Faeroes.

In addition to farming salmonids there is also production of Atlantic white halibut in Norway.

Downstream; the company has significant production of value-added products, mainly based
on salmon, but also based on other species sourced from strategic partners or external
suppliers. We are one of the top producers of smoked salmon in Europe and also do some
smoked salmon production in Chile and the US.

68

Appendix: Marine Harvest worldwide

Marine Harvest worldwide

*Sales office

Marine Harvest operations

Marine Harvest is represented in 21 countries, 6 of which have farming. The company is
listed on Oslo Stock Exchange (:MHG) and has more than 15 500 shareholders. The head
office is located in Norway. At the end of 2011, the group had 6 324 employees worldwide,
including temporary employees.

Total turnover for Marine Harvest in 2011 was MNOK 16 132 and Atlantic salmon harvest
volume was 344 000 tons (HOG).

2011 Sales breakdown 2011 Harvest volume (HOG)

69

Appendix: Marine Harvest downstream (VAP)

Marine Harvest downstream (VAP)

From our European downstream operations, about 75% of revenues are made in the three
countries France, Belgium and the Netherlands. Other countries where we have significant
sales are Germany, UK, Italy and Spain. Operating revenues for Marine Harvest VAP Europe
in 2011 was NOK 4 463 million.

Marine Harvests main secondary processed product is smoked salmon, which is done in
France and Belgium. We also process several other species as whitefish and flatfish to ready
meals or packed in modified atmosphere (MAP).

In addition to our European processing plants, we have two salmon smokeries on the
American continent - one in Chile (Delifish) and one in the US (Ducktrap).

70

Appendix: Marine Harvest sales channels (2011)

Marine Harvest sales channels (2011)


Marine Harvest sells its products to several categories of purchasers. We divide them into;
Retail, Food Service (hotels, restaurants, catering), Industry, distributors and others. Each
business unit has their own sales profile. MH Canada and MH Chile sell most of their
production to distributors. In Norway and Scotland, most of the production is head-on-gutted
(HOG) and is therefore sold to industrial customers, who further process the salmon into
other products as filet, portions, smoked salmon or ready meal products.

MH VAP is processing fish from raw material to value-added products and sells 85% of the
production to final sales points met by end consumer (retail + food service).

71

Appendix: Sources for industry and market information

Marine Harvest: www.marineharvest.com
Kontali Analyse: www.kontali.no
Intrafish: www.intrafish.no
Norwegian directorate of Fisheries: www.fiskeridirektoratet.no
Norwegian Ministry of Fisheries and Coastal Affairs: www.fkd.no
Norwegian Seafood Council: www.seafood.no
Norwegian Seafood Federation: www.fhl.no
Chilean Fish Directorate www.sernaperca.cl
FAO: www.fao.org
International fishmeal and fish oil org.: www.iffo.net

Price statistics
Fish Pool Index: www.fishpool.eu
Kontali Analyse (subscription needed): www.kontali.no
Statistics Norway (SSB): www.ssb.no/laks_en/

72

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