Information Bulletin
27 March 2006
Briefing paper on the Pelagic Industry
The attached paper has been prepared following Councillor Drew Ratter’s request for an analysis of the current situation in the pelagic industry.
Due to the uncertainty surrounding the ongoing investigation it has not been possible to do a full impact analysis therefore the paper sets out the current position as understood by Shetland Islands Council and the potential impacts that may occur from a downturn in pelagic activity in Shetland in 2006.
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BRIEFING PAPER
PELAGIC INDUSTRY IN SHETLAND
This paper has been prepared by the Economic Development Unit in response to a question from the Chair of Economic Development on what impact current restrictions in the pelagic fisheries might have on Shetland. The question followed concern over the closure in early February of Sco-Fish, a pelagic processor in the North-East of Scotland. The closure was blamed upon the lack of supply available from pelagic vessels following a reduction in the allowable catch of mackerel in the early part of 2006.
Background
The economy of Shetland is dependent on seafood and in 2003 Shetland’s seafood industry generated a total output of £189 million and was responsible for 65% of all exports from Shetland. The pelagic sector is responsible for a high proportion of the volume and value of seafood that is exported out of Shetland and operates as a core strength within an often vulnerable seafood industry.
Current position
An investigation by the Scottish Fisheries Protection Agency (SFPA) into alleged undeclared landings of pelagic species at Shetland Catch in Lerwick and Fresh Catch in Peterhead is underway. Prior to the conclusion of the investigation the Scottish Executive, in line with regulations governing quota management, has introduced precautionary measures to restrict the total allowable catch in Scotland in 2006. It is understood that the allowable catch of mackerel in Ireland is also restricted. Restrictions in both Scotland and Ireland have reduced the total supply of mackerel available for processing.
The impact of the measures introduced and the uncertainties surrounding the investigation will create new vulnerabilities within the pelagic sector and restrict economic activity within Shetland and Scotland in 2006. The likely effects are considered in brief in the following section.
Potential impact
Shetland is expected to experience three different types of impact as a result of the current situation. The first two types of impact are the immediate effects on businesses in Shetland as a result of a reduced mackerel fishery in 2006. The third type of impact is linked to the uncertainty created by the ongoing investigation. Until the Scottish Executive, through consultation with the European Commission, clarifies the quota management position for 2006 it is not possible to put figures on the expected economic impact upon Shetland. However, all three types of expected impact are described below:
- The first type of impact is the effect of a reduced mackerel fishery on the businesses directly involved, both the vessels and the processor. A reduced throughput of volume and therefore turnover puts pressure on these businesses where fixed costs represent a high proportion of total costs. The reduced supply of mackerel throughout Europe has forced up prices being paid to vessels. This puts pressure on the processors in a market where there is a price ceiling at which customers will switch to substitute protein products. It is understood that these conditions can lead to processors operating at a loss. The Shetland Catch factory and one pelagic vessel have taken steps to reduce costs through a reduction in staffing.
- The second type of impact upon Shetland will be experienced through the knock-on effects throughout the economy from the reduction in pelagic activity. The scale and success of the pelagic sector enables diverse and high quality services to exist in Shetland that may otherwise not exist. It is understood that the businesses listed below are those that have a degree of dependency upon the pelagic industry for their cash flow and therefore a reduction in activity will reduce their ability to reinvest in the seafood industry:
- L.H.D Limited (managing agent)
- Shetland Fish Producers Organisation
- Lerwick Port Authority
- Specialist small and micro engineering companies
- Fuel suppliers
- Net service firms.
- Finally, the ongoing investigation has an impact upon Shetland as it creates significant uncertainty within the industry. This in turn affects business confidence, both within the businesses and financiers. This will have an effect on investment levels throughout the sector. Uncertainty over the future of the industry in Scotland also leaves the Shetland-based industry vulnerable to potential take-over attempts by operators elsewhere, for example Iceland, Holland, Denmark and Norway, where it is understood there is keen interest in the current position.
The effects discussed above will all have a detrimental effect on the Shetland economy. Uncertainty and reduced business turnovers will undoubtedly limit investment in Shetland in 2006. However, in the long-term, there is also the potential for positive economic benefits. Should the industry be in a position to recover in 2007 then Shetland will be in a good position to benefit from the removal of undeclared pelagic landings throughout Europe. Undeclared landings have been a long-running issue throughout the fishing industry with investigations and prosecutions since the inception of the Common Fisheries Policy in 1983. The introduction in the Spring of 2005 of legislation to license all sellers and buyers of first-sale fish in the UK was expected to remove undeclared landings from the pelagic industry. If this is achieved the following long-term benefits are expected:
- A level-playing field will be created enabling market-forces to determine the success or otherwise of businesses within the sector.
- Decisions within the quota and stock management system will be better informed of the true stock and landing situation. It is expected that one outcome will be higher quotas as recent allowable catch increases have been below what scientific advisors have recommended.
- Better knowledge and fair competition within the sector should help to create a stable price.
However, the ability of Shetland to enjoy these benefits will be determined by the degree to which the fleet and the processor survive the measures taken to restrict the pelagic fishery in 2006.
Future activity
The ongoing investigation is a sensitive subject area and this report does not attempt to predict the outcome of the investigation or any subsequent impacts. The Economic Development Unit is working closely with industry representatives to monitor the situation and further updates will be available once the position becomes more clearly defined.
In addition to monitoring the situation the pelagic sector and the wider seafood industry are working with the Economic Development Unit and other key economic development partners on the Shetland Seafood Development Project. The objective of the project is to strengthen the seafood industry so that it is better able to withstand the short-term economic knocks that the industry will inevitably continue to face. All of the partners and industry sectors support the one cross-cutting theme of the project which is the need improve the sustainability of the whole seafood industry for the long-term benefit of Shetland.
Conclusions
In the absence of reliable information this report has identified the potential types of impact, without attempting to quantify them. However, it is clear that the dependency on seafood and the small size and geographic isolation of Shetland means that a loss of pelagic activity in 2006 is expected to reverberate around the islands’ economy, creating a knock-on effect beyond the reduction in turnover of the pelagic vessels and processor.
The pelagic sector, and in particular the mackerel fishery, is a core strength in the diverse and often fragile Shetland seafood industry that dominates the economy of the islands. For Shetland, the issues associated with being a peripheral island economy mean that it is difficult to identify a substitute economic activity that could replace the mackerel fishery should it ever move out of Shetland. However, if the Shetland-based pelagic sector survives the measures it faces in 2006, and any subsequent outcome from the ongoing investigation, it is expected that the long-term benefits of fewer undeclared landings throughout Europe will create a more sustainable and successful sector. This will provide significant and long-term income to the wider seafood industry and support a sustainable Shetland economy.
Economic Development Unit
Shetland Islands Council
23rd March 2006