The Economics of Farming in Bulk Tanker Vessels
We had some good media coverage on the Marinova project last week. Thanks to Intrafish, SalmonBusiness and Undercurrent for covering the story. Related to this, the media also had some interesting coverage on the Guoxin vessels in China. While there are some key differences between our project and theirs, both are using bulk tankers as working platforms for growing and transporting farmed fish in international waters.
One theme that came up a few times was the notion that the economics of using bulk tankers as a production platform could not possibly work out to produce fish at a cost-effective level and that the Chinese would do things which only worked when government support was involved. I’m no expert on China nor the Chinese economic model but I’m pretty sure that line of reasoning is deeply rooted in western cultural bias and a belief that Chinese economics only work in China.
So, as a favour to my regular readers, I thought I’d look at some publicly available information and put together a high-level summary of the basic economics of using bulk tankers of various sizes to produce farmed Atlantic salmon in a closed-containment, flow-through seawater production system. Here is the approach I took:
1) Charter costs – I’ve published this link a few times but here it is again. The website www.handybulk.com publishes charter rates by region and vessel for short-term charters, full-year charters and whole host of other things. It’s definitely worth spending a few minutes to look at the site. In the analysis below, I’ve used the full-year charter rates for a few vessel types and sizes.
2) Fuel costs – for each vessel type, I asked ChatGPT (we’ve moved past our feud) to estimate fuel costs per day for each vessel type. It provided daily consumption estimates for three fuel types assuming a stately 7 knots/hour of vessel speed. (I’ll note that the Marinova project will use wind-assisted propulsion for 90% of travel in international waters, so this estimate is very conservative with respect to our project) On the fuel cost and volume figures, I used the mid-range of the estimates as my data points. The fuel type used will vary by vessel and region - I assumed the mid-range Low Sulphur Fuel Oil (LSFO) in my estimates.
3) Vessel holds and tank volumes – again, I asked ChatGPT to give me hold sizes for each vessel type. I assumed that culture tanks would occupy 75% of the hold-space available. Given how much deck space is available for mechanical systems, feed storage etc., I think this is a reasonable number.
4) I modelled production volumes based on a peak production density of 47 kg/m3, industry average harvest weights, and a growth trajectory based on an ability to maintain optimal 12 – 14-degree water temperatures year-round. For reference, net pen operators generally plan on peak densities of 20 – 25 kg/m3, while the land-based crowd plan for 60 – 80 kg/m3. Given that incoming water will be changed 17 times per day, filtered and disinfected, this is a reasonable farming density. I didn’t provide full background to my growth model calculations as I reserved the right to maintain a certain air of mystery and worked like a dog for weeks to put the model together.
Here's where I landed on my calculations:
Charter and fuel costs by vessel type
My conclusions:
The Guoxin vessels are much larger than we are planning to use for Marinova – media statements claim the first vessel, Guoxin-1 was the same size as a Panamax tanker, with the next vessels being 50% larger at 150,000 GWT. Based on the published rates, the economics of using larger tankers hold up as the unit cost per cubic meter of hold-space improves with increasing size.
In the context of North American or European ports, the key argument for sticking with the “smaller” Panamax, Ultramax and Kamsarmax vessels is port access. While China has an incredible infrastructure for handling large vessels, North Atlantic ports are more limited in capacity.
Production Costs
Here is a snip from the Mowi Industry Handbook 2024:
Norway Production Cost estimate from 2023
My understanding is that current production costs are in the range of $5.70 - $6.00 per kg. The current distribution of costs across these categories similar to 2023. In terms of operating costs, I would expect the vessel charter to cover interest, miscellaneous operating costs, depreciation and labour. If my assumption of $5.85/kg farm gate cost is correct, these categories would account for 27% of the cost structure or $1.61 per kg. At $2.40/kg, a Panamax tanker would be $0.79/kg more expensive than net pen operations in Norway.
A key thing to keep in mind, however, is that salmon industry costs are presented in a “plant-gate” manner – the fish is assumed to have been bled, gutted, and packed in a box ready for shipment to the customer. For the US market, however, 75% of salmon sold in the market is shipped by air from either Europe or Chile. I’m a bit out of touch with Chilean air freight costs but, for European producers, air freight costs are around $2.00 - $2.25 per kg. On a net cost-to-market basis, using a bulk tanker as a production platform and harvesting in a port adjacent to a major US market would be significantly cheaper.
From a total production cost perspective, my clumsy estimate would put total production cost in the $6.00 to $6.50 /kg range delivered to the US market for Atlantic Salmon produced in a bulk tanker. Here are the forward market price estimates from the Salmar Q4 – 2024 quarterly report.
Salmar Q4 2024 Forward Price Estimates
Converting from NOK to USD, this puts the average expected market price for farmed salmon at $9.00 per kg. With these prices, there is certainly room for very healthy margins.
If you are still reading, you are a legend. If you have interest in taking a deeper look at the Marinova project, please reach out. We have detailed cost and production modelling to support the project. My objective with this post was to demonstrate, as much as possible, how the economics of deep-sea farming using large vessels could work, using publicly available data.
Feedback, comments, inquiries welcomed via the comment section below, LinkedIn or Info@AlanWCook.com