Modelling impacts of the rising price of fuel
We know that seafood businesses are being impacted by rising fuel costs. This was already an issue before the Russian invasion of Ukraine, but prices have increased further in recent weeks. Prices can vary depending on amount of fuel ordered and where it’s purchased, but we have seen examples of price increases as high as 50% in some areas.
Such significant cost increases will have an impact on businesses in a variety of ways and it’s important that we understand how this could affect the wider seafood supply chain. Price increases will affect production costs across the supply chain, not just amongst the fishing fleet, and will ultimately lead to higher prices for consumers.
We’ve been modelling different price scenarios so we can understand the likely implications for the catching and processing sectors. We’ve shared this information with Government so they are informed too.
How do we expect energy price increases to impact on the catching sector?
We applied economic modelling and scenario analysis to assess the impact of increasing fuel prices across the UK fishing fleet. We modelled three different scenarios that used a combination of fuel price increases and fish price changes. The fuel prices modelled range from £0.68 to £0.90 per litre. We also modelled a reduction in fishing effort (by 20%) to reflect the action that some vessel owners might take in light of rising fuel costs. The analyses provide results for thirty one fleet segments, which cover all fishing vessels operating in the UK.
Unsurprisingly, the parts of the fleet that are heavily reliant on fuel use are particularly vulnerable to fuel price increases. This includes the demersal and nephrops trawlers, the beam trawlers and the scallop dredgers, that supply most of the shellfish and demersal species landed. We would expect fleet profitability to be affected if costs increase, however the worst case scenario modelled shows that overall operating profit will be negative for the UK fleet (excluding the pelagic fleet). We also know that some parts of the fleet (nephrops trawlers, scallopers and beam trawlers) are particularly ‘at risk’ and are not expected to be profitable under any of the three scenarios. According to our estimates, a quarter of the total jobs reliant on these ‘at risk’ segments of the fleet could be in jeopardy. We expect that some of this impact will be mitigated by a possible rise in whitefish prices in response to the impact that Russian invasion of Ukraine will have on supply, but this is unlikely to benefit vessels fishing for nephrops or scallops.
A slide deck detailing our analysis is available to download from the link below:
The rising price of fuel is another challenge facing seafood businesses, and it comes as the sector is still recovering from the impacts of the Covid-19 pandemic and the changing requirements post EU Exit. When challenging situations arise, economic data and modelling tools are vital in helping us understand how the impacts may be felt across industry. We share the insights we gain from this analysis with Government and industry to ensure there is accurate information to inform decision making.
Our annual fleet survey provides the vital data that enables us to undertake this analysis. In recent years this information has been used by Government to help develop Covid recovery schemes, by national federations seeking to influence government, and by individual owners making decisions for their business. It’s only by speaking with all types of fishing businesses that we can provide accurate, comprehensive and current data. We’d encourage skippers and vessel owners across the country to particulate in the next fleet survey when it launches this summer.
How do we expect energy price increases to impact on the seafood processing sector?
While we know that energy costs only account for around 2% of total turnover, we should not underestimate the impact that fuel price hikes will have on transportation and distribution costs.
We also know that the UK processing sector generally operates on a very low margin. Demersal fish processors in 2018 had on average a 2.9% operating profit margin, the gross value added (GVA) to turnover ratio was 14%, and their raw material costs compared to total income reached 72%. This means that if raw material prices increase by 20-30% in response to fuel price hikes (our modelled increase of whitefish species prices), then operating profit, net profit and GVA margins would drop to negative.
To stay in business processors would in turn need to increase their prices and pass raw material and transportation/distribution cost increases to consumers. There is a risk that consumers will not be able to absorb higher prices and might switch to cheaper protein alternatives such as chicken and pork.
We have just launched our regular processing sector survey to collect data on processing sector activities and financial costs so that we can create a more up to date picture of economic performance of the sector.
What can the fishing fleet do to reduce the impact of fuel price increases?
We know that fuel price increases have happened before. From 2004 to 2008 there was a steady rise in fuel prices with costs in mid-2008 reaching a high of almost four times the 2004 price. We also know that when fuel prices increase, impact is usually first felt by the fishing fleet.
Back in 2008 we produced a short guide that highlighted the steps that skippers and vessel operators could take to reduce fuel use. Much of this information is still relevant today so we’re resharing these points below.
- Optimising gear and fishing methods: The biggest contributors to drag are the netting itself and the trawl doors. Ensuring fishing gear is correctly matched and rigged for the vessel, conditions and target fishery is key to achieving fuel efficiency.
- Vessel optimisation and propulsion: Another significant factor affecting fuel efficiency is vessel design and the correct matching of the propulsion system (engine/gearbox/propeller) for the task in hand. Propulsion systems should be checked - most vessels' propellers are only 30% efficient. Fitting a nozzle can result in dramatic improvements.
- Vessel and hull maintenance: An often overlooked area of potential fuel savings is vessel and hull maintenance. Little financial outlay is required but the benefits can be worth it over time. A dirty hull is like driving a car with the hand brake on. Poorly finished paintwork can have a similar effect.
- Operational husbandry and auxiliary engines: ‘Good housekeeping’ onboard a vessel and an awareness of fuel saving practices, such as using a fuel flow meter, should not be underestimated. Fuel flow meters can help skippers save around 10% on your fuel bill. If you can’t measure it, you can’t save it.
- Engine maintenance and monitoring: Poor combustion chamber sealing can lead to high fuel consumption. Regular engine maintenance is crucial to reducing fuel consumption.
- Fuel and lubrication: If you have bacterial growth in your fuel this can lead to blocked fuel lines and poorly performing injectors. A biocide can remove any bacteria and clean up your tank and lines.
- Economic benchmarking: Benchmarking is a way to compare the financial performance of a vessel to the ‘best–in–class.’ You can look at your vessel’s performance compared to others and consider whether this fits your expectations, given what you know about how your vessel is run. Vessel owners supplying accounts to our Economics team receive a benchmark report, provided enough data is available to prepare one.
Get in touch
If your business is being affected by rising fuel costs and you’d like to share information with us please contact email@example.com.