Trends in Abalone Farm Production

and Consumption in China

Alex Ziolkowski 2014Seafood Consulting Services P/L

• The next 5 pages are a quote taken from an International Abalone Society (IAS) newsletter published in July 2010

• The comments in italics below the IAS quotes are mine

Abalone Farming in ChinaKangsen Mai, Huihui Zhou

(Ocean University of China)

As highly valued seafood in Chinese culture, abalone farming has beenfast growing extensively in recent years. The total production increasedfrom 19956 metric tons in 2006 to 42373 metric tons in 2009, with28.6% increase annually.

• Based on the 28.6% annual increase. China should have produced about 70,000 tonnes in 2011. Actual production was reported to be about 74,000 tonnes

• Anecdotally, 2013 production was around 90,000 tonnes

Abalone farming mainly distributes in two areas in China: thenorth coast, including Liaoning, Hebei and Shandongprovinces, and the south coast, Fujian and Guangdongprovinces.

The obvious change of abalone farming in China in the recentyears is that the main abalone farming area shifts from thenorth coast to the south coast.

Particularly, Fujian province produced 29113 metric tonsof cultured abalone in 2009, accounting for 68.7% ofnational output.

However, it produced only 2028 metric tons in 1999.

• A more than 10 fold increase in 10 years

Another change is that the farming scale of Haliotisdiversicolor has become smaller and smaller due todisease problems.

And Haliotis discus hannai has been graduallyintroduced to Fujian province from the north and hasbecome the major species cultured in south China.

The hybrid species between the two populations ofHaliotis discus hannai, male from Iwate Japan and femalefrom Dalian, China, has been widely cultured in China.

Another hybrid between Haliotis discus hannai Ino () ×Haliotis discus discus Ino () has been also successfullyfarmed in south China.

Hybrid species demonstrate their heterosis1 withsignificantly better growth rate, disease resistance, andincrease of optimum temperature limit 3-4℃.1 Means Hybrid Vigour - the improved or increased function of any biologicalquality in a hybrid offspring

• Comments regarding abalone farms in China only relate to the Southern abalone farming areas mentioned in the IAS quote

Lianjiang in the NorthFotanGulei in the middleDongshanHuilai in the South

Mainly Sea BasedLand BasedLand BasedLand BasedLand Based

• To understand the scale of this production, it takes about 9 hours to drive from Lianjiang to Huilai.

• The distance and area covered by the abalone farms is enormous as can be seen on the map in the next slide.

Area Map

Farming Areas Visited

There are 2 methods of abalone farming currently being undertaken in China

Land based

• There are many variations of the same basic design• Concrete tanks of various sizes and depths• Plastic cages in the tanks to hold the abalone

Sea based

2 types of Culture

• Barrel culture suspended on long floating lines• Nets suspended from floating raft structures

Land Based

2 different types of land farms will be shown. As you will see they are similar in construction.

All farms operate on the flow through principle.

Water is pumped onshore, usually on an incoming tide, filtered through sand beds and then gravity fed to the farm tanks by pipes.

Waste water is allowed to flow back out to sea by open channel, usually on an outgoing tide.

Gulei Peninsula showing land based Abalone Farms on Eastern side

• The black stripe following the coast for about 10km is all land based farms• Other types of aquaculture farms can be seen on the Western side.

Land Based – Typical Farm • Newly constructed tanks (Black shade cloth not yet covering the

tanks and usually only used in summer to slow algae growth)• Gulei area

Land Based – Abalone in cage (Note the seaweed) and how activethe abalone are

Land Based – Abalone (Note the size)• These are healthy, good quality fish• The argument that the quality is rubbish can no longer be used

Land Based

• Huilai area

Land Based

• Note the shade cloth covering the tanks

Land Based

• Not typical construction but this is an older farm left from the Taiwanese construction days. Probably typhoon proof

Land Based

• A more typical farm. Not typhoon proof

Land Based• Tank construction – note the air distribution pipes on

the bottom between the basket supports

Land Based

• Basket cages in an empty tank (the doors are all open so no abalone). Typically about 800 cages per tank.

Land Based

• Workers checking and feeding the caged abalone

Land Based

• A juvenile tank – note the concrete tiles for the abalone to hide under

Land Based

• Concrete tiles for the juveniles

Other Land Based – Lianjiang Area

• Very little flat land here. This farm is on a cliff top• Note the aquaculture in the sea. This is probably abalone

Other Land Based –

• Different style of tank but basically the same design

Other Land Based –

Other Land Based –

• Tanks are smaller so it is easier to access stock for checking and feeding

Other Land Based –

Other Land Based –

Other Land Based –

• Again, note the size and quality of the fish

Sea Based – Barrel Culture

Sea Based – Barrel Culture

Sea Based – Barrel Culture• Again, note the aquaculture in the sea, right up to the

other shoreline• The land based farm seen in the previous slide is

behind this photo. You can see how high it is

Sea Based – Barrel Culture

Sea Based – Barrel Culture

Sea Based – Barrel Culture

• Feeding and checking the abalone

Sea Based – Barrel Culture

Sea Based – Barrel Culture

Sea Based – Barrel Culture• These have only been in the sea for about 1 month• They have been moved from a land based farm at about

7cm size

Sea Based – Barrel Culture• These have been in the sea for about 4 months • Size when put in the barrel was about 7 cm – about

1.5 cm growth

Sea Based – Barrel Culture• Note the size – these are about 10cm

Sea Based – Barrel Culture• Again note the size, deep shell and how active the

abalone is

Sea Based – Raft Culture

The sea based raft culture farms shown in the next few slides are mostly owned by individual families or family groups.

The family owned farms are too small to have their own hatcheries so buy juveniles from land based hatcheries.

Sea based farming is inherently more risky due to the possibility of mortalities caused by weather (typhoons), high water temperatures, algal blooms etc

They are typically harvested at smaller sizes to minimise the financial risk and for cash flow.

Sea Based – Raft Culture• Note the extent of the farms – all along the coast up

until the rocky headland in front of the leading boat

Sea Based – Raft Culture

Sea Based – Raft Culture

Sea Based – Raft Culture

• Families live on the rafts. They even have electricity

Sea Based – Raft Culture (across the channel – more)

Sea Based – Raft Culture

Sea Based – Raft Culture

• Nets with cage structures

Sea Based – Raft Culture

• Cage structure for holding abalone

Sea Based – New Style Raft Culture

Sea Based – Raft Culture• This view is on the opposite side of the promontory we

saw in previous slide. Note the huge number of farms in the bay

Sea Based – Raft Culture

Sea Based – Raft Culture

Sea Based – Raft Culture

Sea Based – Raft Culture

• Racks for holding the abalone

What does it all mean?

We have already noted that:

• Production in 2011 was about 74,000 tonnes due to an average annual increase in production of 28.6%

• Production in 2013 was about 90,000 tonnes. An average increase of roughly 10% per annum.

• This is confirmed by the report, “China Aquaculture Industry Report, 2014-2017” 1

• Quote - “According to the report, China’s aquaculture output has grown steadily at annual rates of 4.7% for marine products and 6.1% for freshwater from 2007 to 2012.

• The fastest-growing crops were abalone and sea cucumber, which rose at annual rates of more than 10%.”

1 Undercurrent News, July 21, 2014

What does it all mean?

• Most of us have been to conferences where it was regularly quoted that the annual world demand for abalone was about 30,000 tonnes.

• The declining wild catch rate was well below that but aquaculture was supposed to make up the shortfall.

• With current world production of wild caught and aquaculture abalone at 100,000 tonnes+ per year where did they get it so wrong?

• Clearly the experts didn’t take China’s expansion in all forms of aquaculture into account

• The wholesale shift of abalone aquaculture from cold northern waters to the warmer southern areas was not foreseen

• The change from H. diversicolor to H. discus hannai was not foreseen• The higher growth rates and temperature tolerance of the H. discus

hanai (Ino) hybrid could not possibly have been foreseen

What does it all mean?

With world production now at 3 to 4 times the projected demand, where has all that product gone?

With thousands of millionaires being created by China’s burgeoning economy, the population is clearly much wealthier than 20 years ago.• But we don’t sell directly to them and most of the younger generation

would rather buy McDonalds, KFC or a steak than abalone• We mainly sell to the service industry and if the restaurants can’t make

a profit on the product they take it off the menu (more on that later)

Traditionally, abalone was sold in high end restaurants, often located in 5 star or higher hotels• The number of these restaurants and hotels is limited even with the

huge expansion in number in China and could not possibly account for the extra consumption

• The price of a meal including abalone was high

Where did it all go?

What does it all mean?

A whole new market was created

The H. discus hannai (Ino) hybrid is fast growing, growing to a reasonable size in 12 – 18 months, looks good and is tasty.

It is also relatively cheap to produce compared to traditional wild caught abalone

Most of the aquaculture production in China is harvested and sold below 70mm

Prices are size or per piece based rather than per kg so smaller sizes are cheaper which means they are priced in a range where even the lower middle class can afford to eat them

There are a vast number of small restaurants that already sell and cook live fish that provide a ready distribution chain

The excellent highway system allows distribution across more Chinese cities and towns than previously possible

What’s happened?

Why has the growth in production trended down in the last 2 years?

1. There have been several incidences of algal blooms in the last 2 years which have impacted some of the aquaculture sites

2. A typhoon hit some of the aquaculture sites last year causing damage to the farms and mortalities probably due to pumping infrastructure damage

3. Increasing costs of production pushing out smaller inefficient farms

• Cost of seaweed doubled during the 2012-2013 growing season

• Labour costs have increased – “In the 5 years to 2013, real wages in manufacturing rose by about 2 per cent in the US, but by 45 per cent in China”1

• Energy costs have increased

4. The austerity measures implemented by Xi Xingping when he was installed as the President of China

1 The Age, Business Day, page 6, Aug 2 2014. How China’s fortunes are changing

What’s happened?

The austerity measures have had a huge impact on the luxury food and drink industry in China

Xi Xingping initially told the military leaders in late 2012 that they were to stop having lavish banquets.• The share price of Moutai (the producer of China’s famous clear spirit

derived from rice) dropped 40%

The ban was extended to the bureaucracy and as we know many of the top restaurants in Beijing and Shanghai frequented by them experienced severe downturns and many had to restructure to cheaper menus

In March 2014 there were reports in Hong Kong newspapers that the General in charge of Logistics was being investigated for $billions of fraud and corruption

In a recent article in the Age in an article titled “Purge claims biggest scalp yet” it was reported that Zhou Yongkang was being investigated 1

1 The Age, World, page 14, July 31 2014

What’s happened?

The austerity measures have had a huge impact on the luxury food and drink industry in China

Luxury foods all suffered dramatic reductions in price and demand.

The domestic production of abalone, especially canned production was especially affected.

The farm gate price of farmed abalone has fallen dramatically

Many abalone farms have restructured, consolidated, closed or changed to production of other species. Those farms that can afford the extra holding costs are also growing larger more profitable sizes (up to 4 – 5 pieces per 213g can)

Faced by falling demand for canned product, many processors looked to exporting large volumes of product previously absorbed by the domestic market at significantly reduced prices straining already weak canned markets and reducing prices and demand for wild caught product

Future Trends?

The austerity drive against corruption and graft is unlikely to stop soon• The grey channel will continue to be problematic

• Border crossings at Hong Kong and Vietnam will continue to be targeted for Customs corruption with closures affecting canned and live abalone shipments

• The need to use the grey Channel is being addressed by the ACA/CRC China Project, the AAA SO2 subcommittee and the China FTA

• Chinese abalone farms will continue to consolidate to improve efficiency and reduce production costs

• Chinese abalone farms will continue to grow abalone to larger more profitable sizes encroaching on smaller size wild catch markets

• Chinese processors will continue to export large quantities of steadily improving product at highly competitive prices

• Product differentiation for Australian and New Zealand abalone will become more important than ever to maintain prices and market share