Monday, March 5, 2012


Article 1---- NYT article
Article 2 ----- Santiago Times article
Article 3---- Digital Journal article

Read the 3 articles and U have 3 different slants on the same subject.
If U check up the NYT article, U will realise the journalists were from ICIJ. Dig further and U realise the initiative is by Center for Public Integrity, a US based and funded organisation. For the NYT article, Chile is seen as the Good Guys and China & Russia, the bad guys.
The article by Santiago Times is more neutral and is probably the work of a Greenpeace activist.
The issues in the article by the Digital Journal is clouded by the EEZ dispute (see below).

By all accounts, there is a drastic depletion in the Trachurus Murphi  (let’s call CJM for Chilean Jack Mackerel for simplicity) stock. The NYT article, however, exaggerates the severity. It claims  “ Stocks have dropped from an estimated 30 million metric (mil m) tons to less than a tenth of that in two decades.” That is simply untrue; biomass stocks probably reached a peak of approx. 8mil mtons.
The article by Santiago Times points to Chile as the main offender. With Green Peace as the NGO involved, the figures and facts cited  look more believable.

Undeniably, there is a problem with the drastic depletion.

Who and what are the vested interests and how did all these come about?
Let’s investigate.
Jack mackerel shows a clear pattern of movement towards the open sea outside the EEZ, with reproductive purposes, to then return and remain for the most part close to the coast for trophic (feeding) purposes. There are actually distinct species of jack mackerel in the North and the Centre south of Chile. But as the situation is critical, the scientists have chosen to lump the 2 together and consider as one specie for the sake of research and conservation. CJM are pelagic fishes meaning they live in the region of the oceans off the coast and the ocean floor.
Due to their feeding and spawning patterns, there is seasonality--- with the Centre-south having peak catches between April-July and the North having peaks at March.
Chile stands to gain most from any efforts to set up a fishery. Much of the recorded research are done by the Chileans ( funded 67 research projects and 2 large monitoring programs) on the CJM. In terms of catch proportions, Chile takes up more than 86% of all catch. Chilean landings reached a national maximum of 4.4 million tons(max  96% of total catch) in 1995. So clearly, from a standpoint of vested interests Chile benefited most from any efforts to set up a fishery with quota limits to prevent depletion.
Jack mackerel exploitation by Chilean went beyond the first 100 nautical miles (n.m.) in 1992 and, the incidence of catches recorded between the 100 n.m. and 200 n.m. area was higher than 30%. In 2002 - 2003 this extended to catches recorded outside the EEZ, including even up to 700 n.m. off the coast. Hence U can see that as availability decreased the Chileans were moving out further and in bigger ships. EEZ limit is 200nm according to the UN Law of the Sea.

What is SPRFMO?
The Chilean Monitoring programs use hydro acoustic studies to map the biomass.
As the T Murphi is considered a “Straddling stock”---meaning it migrates from the EEZ to the international waters---- the fishery set up for the CJM must by definition include both the EEZ and international waters.
So to sum up SPRFMO is needed as CJM spatial area involves international waters (territorial water stops at 12 nm), far beyond the EEZ, which is beyond Chilean jurisdiction.

Region included is in the shape of a T with the top of the horizontal T at the coast of Chile and the length of the T extending to NZ with the base up to Tasmania. The exact latitudes and longitudes are defined in the Convention documents.
The T Murphi is considered non-highly migratory----i.e. it migrates and straddles a large spatial area --- but that area is still possible to be mapped and conserved as a fishery. Hence the setup of the SPFRMO is a 1st step towards the conservation efforts.

There are a series of steps in setting up the SPRFMO:-
1) Signature and ratification
2) Period of Accession
3) Entry into force

The Convention shall enter into force 30 days after the date of the receipt by the Depositary of the 8th instrument of ratification, accession, acceptance or approval .

NZ (Auckland) was chosen as the Depositary and the venue for the 1st meeting held in Nov 2009.

Since then the SWG (Scientific Working Group) has had a series of 10 meetings in various places from Colombia, Vanuatu, Auckland, Santiago etc to thrash out the details.

Two key area of conservation efforts -----the T Murphi (CJM) and Vulnerable Marine Ecosystems (VMEs) as a result of Bottom Fishing  ( Benthic Impact Assessments)---- were targeted at.

The Good News is that the Final Report has been published  on 3rd Feb 2012 and the Conference adopted the present document as its final report on all matters within its mandate and decided to transmit the report to the Commission. Surprisingly, this important fact and good news is not followed up and publicised by the same reporters who covered and sensationalise the earlier story just before the SPRFMO meeting kicked off on 29 Jan 2012 and ended on 3rd Feb 2012.
Barring any last minute hiccups, most of the details especially wrt SWG have been worked out. The next stage will be the setup of “the Commission” with the aim of implementing the measures agreed with secretariat setup, budgeting, manpower etc.

Note that the EEZ itself is in dispute ; yet, to be resolved between Chile and Peru.
By taking sides with Chile, the NYT article loses objectivity. The T Murphi Fishery is in disarray and badly in need for repair of stocks i.e. conservation efforts. Confusing the Peruvian Anchovy Fishery with the T Murphi Fishery does no good as they are quite different issues. In fact, the Peruvian Anchovy Fishery is quite ably managed by IMARPE.

Until the Commission is set up there are Interim Measures that members must comply.
Gross Tonnage
Participants are to limit the gross tonnage (GT) of vessels flying their flag to those that have been actively fishing in 2007 or 2008 or 2009 in the Convention Area, and may substitute their vessels as long as the total level of GT that was submitted by Participants to the Interim Secretariat in accordance with the 2009 Interim Measures for Trachurus fisheries, as provided for in Table 1, is not exceeded.
Participants will verify the effective presence of their vessels referred to in paragraph 8 through VMS records and catch reports.
 From 4 February 2012, participants are not to exceed the levels of total GT1 listed in Table 1.

 Catch management
The Interim Secretariat shall verify the annual catch reports submitted by the Participants against the submitted data (tow by tow in the case of trawlers, and set by set or trip by trip in the case of purse-seining fishing vessels). The Interim Secretariat shall inform the Participants of the outcome of the verification exercise and any possible discrepancies encountered.

In 2012 Participants will continue their efforts to reduce their annual catches of Trachurus species. To that end, in 2012 Participants will limit their annual catches of Trachurus species by vessels flying their flag to the order of 40% of their final annual recorded catch of that species in 2010, and taking into account paragraph 1.3.

It is recognized that Participants may elect to reduce their catches of Trachurus species in 2012 by more than 60% of its final annual recorded catch of that species in 2010, as reported to the Interim Secretariat, as specified in paragraph 12.

 Some Salient Points
1)Effects of El NinoThe migratory patterns of the T Murphi  are believed to be affected by effects of El Nino and La Nina which affects the surface temperatures of the currents and hence their migratory patterns for spawning and feeding. But, for the moment there is insufficient scientific data by the Chileans to document the effects. IFFO (Peruvian Anchovy Fishery) has very well documented data on the effects of El Nino which affects the upwelling currents along the Peruvian Coast, affecting the trophic activities of phytoplankton;  in turn affecting the biomass of anchoveta that feeds on them--- which could then affect the entire food chain. It is a great  pity that the NYT article did not even mention EL Nino which is an important factor in its report.
2) Effects of the Chilean Earthquake of 2010- It is not understood how this massive earthquake and subsequent ones in 2011 affected the marine ecosystem on the Ocean floor and the migratory patterns of the CJM. Chile seats on a faultline (plate tectonics) and in 2011 itself experience earthquakes in Jan, Feb ( many times over 4 days), Mar, Apr, Jun, July and Dec. Nearby Peru had earthquakes in Aug and Oct.
3) T Murphi (CJM) not anchoveta- Contrary to the NYT article, the conservation efforts are not for anchoveta, which are not under threat. 

4) Previous Chilean Govt Efforts at reforming Fisheries to prevent OverFishing---- Prior to the coming SPRFMO setup which will come with an ITQ system for all Global participants, we must be alerted that previous Chilean Govt Efforts has form but no spirit in its implementation---- has largely failed due to powerful lobby groups, weak enforcement and constitutional issues with implementing legislation.

5) CFG (China Fishery Group) ---- Is joining the the SPRFMO via the Russian allocation.  Note that even their ITQ allocation for Alaskan Pollock in the North Pacific is allocated via Russian ownership. CFG will have to abide by the rules and regulations agreed in the Convention and as governed by the Commission. Many confuse CFG as being a China company; in fact they fish under the Russian fleet.

6) ITQ System----- The merits of having an ITQ system is discussed in this paper by Ragnar Arnason. ITQs constitute property rights in harvest not fishing stock. Under ITQs, good management consists of setting:
 (i) the total allowable catch (TAC),
 (ii) other useful fisheries management instruments,
 (iii) the enforcement of the quota constraints, and
(iv) the supporting research at levels where their return from the fishery is maximized.

The key is when the vested interests of the fishery members who own the ITQs coincide with their collective interest to maximise their long term sustainable holdings in their ITQs.

If the fishing industry which are the ITQ holders have to conduct fisheries management themselves,
their collective incentive is to maximize the net return from the fishery vs the government as the provider of the fisheries management services----the economic return to the industry is independent of the fisheries management costs ---- and in the 1990s, Ministry of Fisheries in countries like Peru and Chile can end up subsidising the entire fishing industry and suffering a net loss on a national scale. Hence, some of the biggest headaches whereby common property (public) rights are not respected but abused and be subject to political lobbies and favouritism are removed. 

7) Olympic System---- Prior to the ITQ system Peru and Chile practises the Olympic System – whereby at the start of the season upon blowing of the whistle, all vessels rush in frenzy to scoop as much fish into their holds as possible; w/o regard for refrigeration or death of the fish. This leads to staggering wastage and overfishing, as the dead carcasses of stale fish are just thrown overboard. The frenzy makes the fishing season front loaded with short bursts and makes for poor planning and efficiency both in terms of fishing and processing. The description in the NYT about boiling blood of CJM; as a result of the Olympic system  is not off the mark. Cheating on weights and trading of the excess catch unsurprisingly was rampant---given the frenzied rush effects-- officials find it difficult to measure and monitor that the allowable catch limits and quotas are conformed.

8) Case studies of successful ITQs (or variants) ----- Iceland has successfully introduced the ITQ system for Herring and Capelin but NOT for Demerol. Even Peru, has since 2009 introduced an IVQ (variant) with considerable success----- with satellite tracking systems onboard fishing vessels and independent audit staff also onboard for proper verification and validation of processes. So IMHO, the NYT article  has been biased in trying to point the finger at CFG or China, Russia or Peru----- much of the damage in Chile has been self-inflicted due to weaknesses in the conflicted government controlled implementations. Is China interested in ITQs? ---- You bet;  as shown in this paper by Dalian Fishery University. Incidentally, CFG is a part of the ITQ system for anchoveta in Peru---- which is undergoing volatilities/fluctuation in biomass arising from the El Nino/La Nina effects.

Some obvious benefits of the ITQ system are the reduction in the number of Overall Catch Vessels and the higher efficiency of catch and higher efficiency in processing of the fish.

9) SPRFMO Commission---- This is privatised self-management by the Industry (involving 15 sovereign states ) as distinct from the government of the day (as in Chile). The merits are argued in a report put up by Icelander Arnason. Once set-up the problems of government succumbing to fettered interests will cease. SPFRMO is industry and privately led -----such privately led Fisheries with ITQs such as the Alaskan Pollock Fishery in the North Pacific, Herring and Capelin Fisheries in Iceland and the Anchoveta Fishery in Peru have proven that the SPFRMO mandates on GroundFish and T Murphi can work.
From initiation in 2006 to 2013 (likely date of implementation), the SPFRMO has held many sessions and the tough and hard slog in the consensus building and negotiation processes is coming to a close in the fruition of a Commission.  Negotiations and compromises amongst so many countries (15 states and some surrounding islands affected) are never easy. Using the media to gain mileage and skew voting is part and parcel of the process.
The key question is whether post-Chilean earthquake and post El Nino/La Nina, the T Murphi will return with larger recruitments as a result of resumption in spawning habits and further events like the above 2 that affects mortality rates will recede.
10) Factory vessel Lafayette and Fleet ----In its desire to increase efficiency and reduce wastage CFG has introduced a quantum change in the manner which fishing is done. Instead of having a supertrawler that catches fish and then return to shore. CFG has broken the fishing process into 3. The trawler/catcher vessels catch the fish. The fishes from the catcher vessels are then sucked up into the factory vessel and instantly frozen to keep the fish fresh. Reefer vessels transport the frozen catch back to shore and also bring supplies, crew and bunker to the factory vessel and the catcher vessels. In this way, the factory vessel can stay out at sea/ocean throughout the year. Crew and Fuel costs are lowered thru such an arrangement as trips are reduced. The Lafayette by design has to be large since it has to accommodate the catch of many vessels. CFG invested in a fleet of 7 catcher vessels and 5 upgraded supertrawlers (freezing capacity of 150mT/d) and the Lafayette (1500mT/d) for the purpose of securing SPRFMO ITQs in 2009. A total of more than USD 100m in capex was spend . But, depressed catches due to the El Nino and Chilean earthquakes has meant that the fleet could not justify the cash burn. Since then the vessels have been deployed to Faroe Islands and Mauritania to catch species like horse mackerel, sardines and herring .

Most of the Chinese owned and Dutch ships who were attracted to the SPRFMO, to stake their ITQs have since left because it is simply not viable to keep a fleet there when the CJM stock are so scarce. Please note that this is a prime example of aligning  vested self interest with collective interests-----Overfish and the stock depletes--- ITQs becomes worthless  and huge capex spend becomes redundant ----- Hence, there is great incentive for private holders of the ITQ system to take care of their collective interest of mantaining a sustainable stock based on the findings of the SWG (Scientific Working Group).

There are quibbles over the way the SWG arrives at its TAC (Total Allowable Catch) advisory figures.
But, this is unnecessary and futile. Due to the emergency status, the SWG uses past 5 year recruitment data furnished by Chile and assumed mortality rates to "pluck" into their models before arriving at the TAC figures/outcomes and must necessarily err on the side of safety to help bring the T Murphi levels back.

11) CFG/PARD Group ----That the Lafayette and CFG has roused the envy and the jealousy of others is no surprise.The PAH Group has eclipsed others to become the No 1 Fishing listco in the world.

Some positives:-

MSC certification ---The CFG and PAH Group is also applying for MSC Certification to ensure traceability of their catches to the Fisheries concerned----starting with Alaskan Pollock. That certification is expected to have been obtained by this year but may drag to next year. Anybody associated say with the pharmaceutical industry will know that FDA inspectors are far more stringent in granting product and facilities certification for foreign domiciled firms  than for  domestic US  firms----- they have the weight of US workers jobs and US domestic firms business on their shoulders. Similarly MSC certification for the Hongdao facilities and for the AP fishery may take longer than first expected. Once certified, CFG/PARD caught and processed Alaskan Pollock fillet should be able to sell in most  MSC conforming bizs--- e.g. Walmart, McDonalds, Long Johnsilvers, Burger King etc.

Mapping of biomass--CFG has set up a CSR committee and has engaged an expert Dr Keith Sainsbury. To augment and improve reliability CFG vessels with latest satellite tracking and sonar devices will help track biomass patterns in the SPRFMO. see empea.
Satellite monitoring as is done for the Peruvian Fishery can help improve  and augment scientifc data which the SPRFMO  has been depending on the Chilean ; as the primary and only source.
Reducing wastage --CFG/PARD Group has pioneered many ways to improve the catch ( as explained above) and fish processing industry ---- reduction in wastage  in terms of fish parts almost 99% including fish bones.
Human Consumption --The fish eating population in the Western world has been known to be picky--- preferring white fish such as cod, trout and salmon which can be filleted and have very few bones. Many of the fishes such as Alaskan Pollock and T Murphi were first used for fishmeal processing for the Salmon industry and other feedstock purposes. CFG/PARD has sought to change the game by selling them for human consumption----- even for the anchoveta!  In fact, CFG competitor TASA has come up with a fishmeal patty omega-3 burger!!
CFG and  PARD have been harvesting these previously fishmeal designated species and converting them into forms suitable for human consumption.  CFG pioneered the double hand lay fillet double frozen Alaskan Pollock (onboard  modified supertrawlers) and changed the way the westerners fished and processed the fish fillet--- in fact  modifying their eating habits---since there is now acceptance of frozen fish (formerly the Westerners only consume freshly caught AP). They also opened up the West African market for fish such as Chilean Jack Mackerel, Horse Mackerel, Herring, Sardines etc. for fish species that were formerly destined just for fishmeal.
As an industry leader its success will attract attention and one might say even envy and jealousy.

Saturday, January 14, 2012

China news

1)National Financial Work Conference

I have been following news reports of the above conference held more than a week back on the new directions that China may take in the financial sector.

Past Conferences & Outcomes

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.
The conference is held once every 5 years. A brief recount shows the signifcance.
The first conference was held in 1997, in the wake of the Asian financial crisis------  led to a plan to remove billions of dollars in bad debt from the balance sheets of the major banks.
The 2002 meeting led to hastening the reform of those banks----  resulted in the eventual overseas listing of Bank of China Ltd., Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
The 3rd 2007 conference led to the establishment of China Investment Corp., the country's sovereign wealth fund.
 From 2006 to 2011-------Banks's NPLs fell to 0.9 % (2011) from 7.1 % (2006);  Banks' overall CAR  increased to 12.3 & (as of Sept 30 2011)  from 7.3% (at the end of 2006).
Recent concluded 2012 Conference
One of the key outcomes of this conference could be the manner in which China policymakers will move towards allowing the free market to set interest rates.
Following three interest rate hikes in 2011, the one-year benchmark deposit rate stands at 3.5 percent, while the loan rate is 6.56 percent, yielding an interest margin of 3.06 percent. These rates are at the moment, all determined by the PBoC and are highly biased by giving a very good margin which is protective of the Big Banks.
That high margin did much to lift banks' total assets to 119 trillion yuan ($18.84 trillion) by the end of last year 2011.
How would China move towards market driven setting of interst rates?
Deposit Insurance
One proposal eyed is deposit insurance---- which would reduce potential default risks and help drive market-oriented interest rate reform for commercial banks.
Once bank interest rates can float freely on a market basis, the interest margin is expected to contract under competition, and it may shrink the bank's profits.
Bankruptcy is normal in a competitive situation, so an insurance system is necessary to protect depositors' assets.
Market forces are expected to play a more important role in fund allocation, and the government's role will be more clearly defined, Premier Wen Jiabao said on the Saturday after the end of the two-day National Financial Work Conference.

Competition would also help SMEs who are the ones suffering most under the tight monetary policies ( after the series of RRR rises last year) get cheaper loans and increase their profit margins.

2) CPI and PPI

Looking at the CPI and PPI Plots U would have noted that China's CPI growth has somewhat moderated at 4.1% yoy , a 15mth low. The PPI plot shows an even more pronounced downward sloping trend for growth, suggesting a possible inprovement in the CPI if producer input price increase continues to abate.
Overall for the year ended 2011, CPI was up 5.4% vs 2010 says NBS.
Remember the CPI target  inflation rate set by Premier Wen was 4%. Many in the local provinces are feeling the pinch of the high inflation and remains high on the agenda of policymakers.

China's CPI

China's PPI

While the overall CP growth is somewhat moderating, food prices remains a prime concern as it forms a massive 1/3 of the CPI basket. Overall Food prices were up 9.1% yoy in Dec. That rise contributed 2.8 percentage points, or more than two-thirds of the general price increase.

China's CPI  Food Components

All Graphics courtesy of China Daily
Food Prices are largely cost driven ----- dependent much on weather conditions (floods etc)  and the agricultural population. In other words supply rather than demand driven.
China policymakers must continue to have policies that favor the agricultural population and promote productivity in grain products as well as animal husbandry.
As China is at an early stage in the economic development path, food will constitute a big portion of the basket but will decline with urbanisation and accompanying income growth.

Lewis Point
Many economists believe China may have already crossed the so-called Lewis turning point, meaning that all excess rural labor has already been absorbed by urban areas and that structurally higher wages -- and inflation -- lay ahead.

Many provincial authorities have rushed to increase minimum wages, in line with central government plans to boost spending power and domestic consumption, despite warnings of tightening labor supply from factory bosses.

High Frequency Economics' Mr Weinberg, estimates non-farm workforce growth of 2-4 per cent a year.

That equates to 10-20 million people moving to the modern economy experiencing annual income growth of up to 400 per cent and contributing between eight to 20 percentage points to the growth rate of aggregate incomes.

3) Forex Reserves

China's forex reserves unexpectedly declined ---- to $3.18 trillion, down $20.6 billion from the previous quarter.
In breakdown, PBoC data showed that foreign exchange reserves increased by $72.1 billion in October, but decreased by $52.9 billion and $39.76 billion respectively in November and December.

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."