The Algorithm Or The Crystal Ball?

Is it possible to predict the Bangkok skipjack price? This important question is one that many of those trading tuna have asked, and only several experts have tried to answer. Can an algorithm of some sort be created, to add some reliability to price prediction, or does it just come down to the old crystal ball?

In end market value, the global tuna business has been pegged at USD 42 billion, meaning massive financial risks are taken when trading this lucrative commodity. Ultimately everyone is trying to avoid these risks by predicting the market.

One of the experts who has extensively studied this topic is Patrice Guillotreau, Professor of Economics at the University of Nantes, who presented the age-old “can we predict tuna prices?” question to the floor at the 2017 European Tuna Conference.

Some of the influencing factors he addressed were: the globally integrated nature of tuna markets; how prices respond to supply and demand conditions; and the link between the tuna commodity market and oil prices. However these are just a few of the elements and a lot more can come into play.

With the majority of globally caught tuna landed in Bangkok, at more than 500,000 tons per year, the Thai capital is the number one location for tuna trading and processing, and the closest destination for carriers filled by WCPO-operating seiners to unload. Always first in line for skipjack caught in the largest tuna fishing ground globally, the prices traded in Bangkok have become the benchmark.
As we look at this major market’s movement over the last 20 years, how have all the influencing factors played out, and what impact have they had on the Bangkok skipjack price?

The Widening Spread

When taking the first 10 year period into account, from 1997-2007, a low of USD 380 per ton and a high of USD 1,100 per ton are identified, for 1 M/T of skipjack 1.8kg and up, delivered CFR in the Bangkok port. This represents a maximum spread of just over USD 700 per ton across the decade.

In the second 10 year period, the market moved to significantly higher levels, with a low of USD 800 and a peak of USD 2,300 per ton. The spread is also much wider here, at USD 1,500, showing increased volatility and risk for tuna buyers.

Many industry sources are now predicting that even higher average price levels in Bangkok will be seen in the future 10 years, and this will only further increase the risks that traders are currently taking, but also the profits for those who make the right price predictions.

The Global Banking Crisis

As it does for many major markets, the strength of the world economy plays a key role in the movement of tuna prices, in Bangkok and beyond.

The evidence of this was most strongly presented around 2007-2009. This period was described as the worst global financial crisis since the great depression of the 1930s; the mortgage related crisis in the US that developed into a major international banking crisis. Irresponsible risk-taking by banks magnified the financial impact globally, and with this came a great effect on the tuna market and its consumers.

Prior to the crisis the demand was strong, and price actually reached a decade peak of USD 2,000 per ton in July 2008. However by the time the financial instability had spread to a global scale, a sharp decline had hit the Bangkok skipjack price. A 60 percent drop caused prices to plummet to USD 800 per ton by December 2008.

Later, by 2015 and 2016 major economies like the US and EU, large tuna buying markets, had seen their financial situation recover. In 2017, a year in which strong highs were recorded in the global skipjack price, a firm upswing has been seen in global economic activity. For 2017 growth is projected to rise to 3.6 percent, and another 3.7 percent in 2018, raising the question if increased strength could also prevail in the Bangkok skipjack market.

How Tuna Markets Are Increasingly Interconnected

Generally, as the Bangkok price moves, other major regional tuna markets are not far behind in following. However, more recently the reverse impact that other markets also have on Bangkok has intensified.

One big example of this is the Eastern Pacific tuna hub of Manta in Ecuador. This processing location has gained increased importance in the tuna business, due to its ever growing need for raw material, and is therefore increasingly impacting prices in Bangkok.

The movement between both the Manta market in the EPO and the Bangkok market in the WCPO has become more closely connected, and the extent of supply in both locations has a knock-on effect on its counterpart.

This is a trend that has become more evident in the last five years. Each year, when the EPO purse seine fishery closure is in play, canners in the region bid higher on raw material caught in the WCPO, in order to cover their contracts going forward. This in turn forces Thai canners, who can already be facing supply shortages, to bid even higher to get their hands on catch.

Big Volume Buyers: Steering The Market?

As such large volume buyers of raw material skipjack, the purchasing behavior of firms like Thai Union and Sea Value has the dominant power to shift market prices dramatically.

Just one of many instances in which the influence of these major Thai firms was seen was at the start of 2015. The mood in the market was that skipjack prices were laying low, around the USD 1,150 per ton mark, and there was firm expectation that companies like TU and Sea Value would use their large buying power to attempt to bid prices down even further.

By the end of January 2015, due to a peak in WCPO catch, a bottleneck had emerged in the market supply chain, and this put these mammoth buyers in an excellent strategic position, providing them with more buying power and the ability to steer prices.

Then by March, the Bangkok price had slipped to USD 1,000, and even further to USD 990 per ton by April, with big buyers having managed to push prices down in the period of oversupply.
At times when much lower raw material supply is reaching the Thai capital, these major buying firms will often purchase large volumes to cover several months of orders going forward, often driving prices up substantially.

The Environmental Effect – El Niño & La Niña

In the WCPO catch data shows that El Niño, the warming of the ocean surface around the coast of South America, tends to produce strong catches in the more eastern zones of the WCPO.
A standout example of this effect is what took place between 2015 and 2016, when the strongest El Niño of the 20 year period occurred. Skipjack swam to find cooler waters around the eastern PNA nations like Kiribati, and the major purse seine fleets fishing in these already tuna-rich zones, witnessed their catches shoot up substantially. With these strong WCPO raw material hauls then being delivered in their majority to Bangkok, this environmental occurrence had a major impact on prices.

Over the course of the El Niño period, the Bangkok skipjack price fell from a high of USD 1,650 per ton to a low of USD 950 per ton, and the strong movement was credited mostly to oversupply in the Thai capital’s market, driven by these warming conditions.

Although it was expected that only WCPO tuna catches would soar during the El Niño months, and that EPO catches would suffer (based on results from past El Niño years) landings from Eastern Pacific zones alsoshot to a record level, disputing the majority of predictions. Some US flagged seiners, which had lost access to PNA waters for part of the time, switched operations to the EPO, meaning that supply boosts were also seen in the regional markets of Manta, as well as Mazatlán in Mexico.

La Niña occurrences, which contrastingly cause the cooling of ocean surface across the equatorial Eastern Central Pacific Ocean, are generally an environmental factor that increase tuna hauls in the EPO. The cooling of the ocean surface temperature in the east usually attracts tuna, particularly skipjack and yellowfin, closer to the surface and in turn makes them easier to catch. In the La Niña year of 2011, the Ecuadorian flagged fleet, the largest in the EPO, saw boosted catches as tuna congregated in the region. In the WCPO catches tend to be lower, and as this supply softens it can therefore have its impact on the Bangkok price.

More recently, towards the close of 2016, La Niña conditions had a major influence on the skipjack market in Bangkok, with it not taking the usual end of year price drop. Supply was shorter in the market and therefore Thai buyers bid higher on raw material that arrived on carriers.

Oil; Does The Tuna Cost Price Always Follow?

One major impacting cost factor on the raw material skipjack price in Bangkok and beyond is the cost of fuel, as this is a substantial part of the operational expense of purse seiners, and can fluctuate massively. Over the last 10 years the crude oil price touched a major high of USD 140 per barrel and a low of around USD 35.

Averagely around 0.65 tons of diesel fuel is used per ton of tuna caught by a purse seiner, and its cost can at times account or up to 50 percent of the vessel’s operations. This clearly explains why regularly certain parallels can be found in the volatile movement of these two commodity markets; oil and tuna.

For instance, when skipjack was at the strongly elevated level of USD 2,350 per ton in April 2013, crude oil prices were above USD 90 per barrel; a considerable height. At the time the cost of fuel appeared to have a hefty impact on the Bangkok market; even more than other major factors like supply and demand.

However, one clear example that these commodity markets are not always interconnected, and can be overruled by other factors, was seen in June 2017, when tuna prices hit a high level of USD 1,850 per ton. The oil market, however was at a 10 month low of USD 45.50 per barrel. This specific low came on the heels of news that US oil inventories had jumped considerably.

Even more recently, in October 2017, crude oil price hit a six month high of USD 54.00 per barrel. Although boatowners were facing bigger fuel costs, other much more powerful factors – in this case short supply and strong demand – caused the record high skipjack price, which touched USD 2,300 per ton.

The Cost Of A Day Of Fishing

In the WCPO, fishing in the high seas is free, but boatowners need an entry ticket for nations’ Exclusive Economic Zones or EEZs. In the PNA, the eight island countries will let a vessel in for a day, but this will come at a significant cost. However, with them owning some of the most skipjack rich waters in the world the catch success rate tends to be higher and many seiners try their luck.

The minimum benchmark for a Vessel Day Scheme (VDS) fishing day in the PNA is currently USD 8,000 per ton, however as fishing companies bid fiercely to get a sufficient number of these limited days, in some cases up to USD 15,000 per day has been paid. And when setting on FADs in the PNA zone, a boatowner will face an even bigger cost; an extra USD 1,000 per each day purchased.

At that level, based on what the average purse seiner can catch during one day of operations, the cost of access can amount to USD 500 per ton of tuna landed. This in turn has a big effect on what price level boatowners are willing to accept for tuna traded in Thailand. Further rises, or a fall in VDS rates will directly relate to a WCPO seiner’s operational costs.

Conservation Has An Expense

Conservation measures can also have a very distinctive effect on the way tuna markets move, and one major example of this is the FAD ban, which has come into force annually in the WCPO since 2009. With over 60 percent of global skipjack catch fished in this region, and the majority caught on FADs, this measure has a big influence on Bangkok supply and therefore prices.

The FAD ban added some sense of rhythm to the market movement in the Thai capital, but even the ups and down it tends to drive cannot be pinpointed to a specific price or even range. The measure comes into action in July each year and while it previously spanned three months it now lasts four months for most major fleets.

As a reaction to the FAD ban, prices already commonly start to rise prior to its start, around June. This is caused by anticipation from buyers that there will be a distinct slump in supply, so processors fill up their inventories. So from around June to September each year since 2009 there has been a notable rise in the Bangkok skipjack price, reflecting the slower supply that generally prevails throughout this period. With purse seiners only permitted to fish free-school, their hauls are usually less, and therefore smaller volumes are delivered to the Thai capital in carriers.

Another trend that has been identified is the fall in prices that commonly comes in the weeks/months after the WCPO FAD ban draws to an end. As seiners start setting on FADs again, catches are boosted and the outlook of a looming surge in supply influences prices traded, usually having a distinct downward impact.

Earlier in 2017, some questioned whether the year would see the end to the post-FAD price drop. The skipjack market was already at extremely elevated levels in the weeks preceding the closure, reaching as high as USD 1,900-1,950 per ton. During the FAD ban prices climbed to record levels, with major shortages in supply and peaked at USD 2,350 per ton. While the post-FAD ban fall was not seen as quickly as expected, clear softening was seen in the market by November.

As well as the FAD ban playing a major role, conservation measures adopted in the EPO also have their impact on the trading of tuna in Bangkok, and this year closures in the Eastern Pacific got even stricter. Every purse seiner operating in the region must cease fishing and return to port for one or two separate 72 day periods. This can either be done from July to October or from November to January.
During these closures, as previously stated, supply to EPO based processors can be limited, with canners therefore offering higher prices to secure needed inventory from WCPO fleets. Thai canners have no choice but to respond and bid even higher if they want to ensure raw material heads to Bangkok, rather than being transported to ports like Manta and Mazatlán.

Higher Demand For FAD-Free

Many recent conservation measures implemented across the global fishery have all been aimed at reducing FAD catch. And as NGOs tell retailers and consumers not to buy FAD caught tuna, the demand for FAD-free from the end market, and therefore also from canners in Bangkok, is rising. There is a notable increasing preference for free-school or FAD-free tuna production from many EU, but also US buyers, over FAD caught fish, and the processors respond to this.

Tuna fleets are reacting to this demand, and more free-school sets are being made.

MSC and Pole & Line Premiums

And it is not just demand for FAD-free purse seine catch that has been rising; demand for pole and line caught tuna and catch with an MSC certification is also gaining pace in Thailand, and packers are willing to pay even more for this tuna. Local canners supply notable volumes to the EU, where retailers and consumers in several large markets have made an increasing call for products that carry a sustainability claim.

The global benchmark skipjack price represents whole round tuna which is non-certified and unsorted in terms of fishing method. On top of the price paid for this raw material, usually FAD catch, premiums of between USD 100–150 per ton have been paid for MSC certified free-school caught skipjack. Record premiums of USD 400 per ton have been paid at times for pole and line catch, both MSC certified and non-certified.

Thailand has become the number one processing location for pole and line caught tuna (MSC and non-MSC) delivered from the Maldives, and also the key canning location of MSC certified free-school caught tuna from the PNA, co-branded by Pacifical. The volume of Pacifical MSC tuna that reached Bangkok in 2016 was around 55,000 tons, and for 2017 was expected to hit well over 75,000 M/T.
If this trend continues then the global tuna industry might start to see trading of pole and line, FAD-free and MSC certified tuna becoming the most common, over FAD catch, in the Thai capital.

What Happens As The Fleet Grows?

There is the general state of mind that as the global purse seine fleet grows in number and capacity, catches will be boosted and skipjack prices in turn will decline. However in the last few years the amount of tuna seiners operating globally has continued to climb, bringing in bigger catches. But at the same time we have seen much higher skipjack prices, contrary to expectations.

For example, it was stated by Phil Roberts, Tri Marine International Managing Director, at the Pacific Tuna Forum in 2015, that as fleet capacity grows, value declines. He said at the time that “purse seine numbers grow continually and so does the total catch and the result is oversupply and depressed market prices.” Around 2014-2015 the purse seine fleet saw its biggest boost in numbers.

Despite efforts to limit seiner construction, however, earlier this year it was reported that this fleet is still growing on a global scale. An accumulation of RFMO data released showed a 10 percent increase in the number of vessels from the previous analysis. Despite this increase, global catching capacity has actually declined by around six percent in 2016. But as commonly known, each newly constructed seiner comes with enhanced technology and more efficiency, driving the general rise in global catches. In 2016 in the WCPO annual catch climbed to the second highest on record.

During the first 10 year period on the price graph, WCPO tuna catches were generally in the range of 1.6 – 2 million tons, while in the second decade period, these climbed to a range of around 2.3 – 2.85 million tons. Looking to the Bangkok skipjack price movement, however, there is little evidence that this increase in raw material supply has had a depressing influence on the market. Other factors are weighing heavier on the prices traded.

Major Market Demand

There is one main reason why global tuna catches are rising and increased or lower quantities of raw material are landed in major processing locations, and that is due to end market demand.

The world population has grown substantially in the last 20 years, from around five billion to nearly 7.5 billion, and the projection is that it will keep on rising. By 2100, the number of people in the world is forecasted to rocket to over a massive 11 billion. With more people obviously come more mouths to feed, and global demand for nutritious, protein rich products like tuna keeps strengthening.

Thailand represents an extremely wide global spread in terms of the markets it delivers to, shipping final tuna products to dozens of different countries, across the Middle East, EU, US and Asia.

Recently, the dominant influence of Thai based canners appears to be declining, while others like Vietnam and China are growing, and more than ever we see locations like Manta and Mazatlán playing big roles in global tuna production. As the global population increases further, this will put more pressure on these production centers to produce larger volumes. Whether or not catches can continue to live up to this intensifying call for end product, especially in light of increased conservation measures, will be one of the biggest determiners of future prices.

So What Does All Of This Tell Us?

While there have been some trends identified in the Bangkok skipjack movement in the past, most notably with the introduction of the WCPFC FAD ban, there are an increasing number of factors in recent years that throw many predictions off path.

As the market becomes even more scattered, researchers and economists, such as Patrice Guillotreau, have used their expertise to delve into the topic of predicting tuna prices. However, even their results, while perhaps shedding more light on what can influence the market, conclude that attempting to project the volatile price movement might not be worth the time and the effort, compared to the accuracy.

With the industry landscape changing daily, pushed by issues like sustainability, end market demand, and capacity and supply from the global purse seine fleet, the movement of the tuna market and the future of Bangkok as a trading benchmark, is arguably now more unpredictable than ever. There are so many factors that have major influence and until now these together have proven it extremely difficult to reliably predict the Bangkok skipjack price.

Will we see volatility exaggerated yet again in the next ten years, and what highs and lows might we see in the market? All industry eyes will be firmly fixed on the movement, as both boatowners and buyers try to avoid big financial risk and benefit from market movement. But before algorithms can rule the business, we might have to stick to the crystal ball.