Tharos Update (Ed.Dec.2015)-Krill Oil Industry Update and ... · Krill Oil Industry Update Chinese ... Phospholipids plus astaxanthin enriched marine and vegetable ... -Krill Oil

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Tharos Oil Extraction Process Krill Oil Industry Update

Chinese Perspective

Ed. December 2015

Tharos Krill Oil + China Update Tharos krill oil solvent-free extraction technology impact has gone beyond the krill industry. Interest from aqua farmers and fishing companies looking for ways to add value to their once dumped offal and by-catch, opened new business opportunities to this technology, keeping focused in the solvent-free extraction concept of phospholipids and triglycerides-enriched oils, plus proteins and astaxanthin. Widening the business model comes as a response from constant interest Tharos receives for a model that generates value from captured and farmed species. The licensing model opens the spectrum of potential users, regions and resources, expanding Tharos+ +25-year exclusive work in krill. The market will grab the power of this model. It will get the much awaited solvent-free, clean marine oil, 100% chemical-free, with unique freshness parameters, no oxidation, very high in valuable compounds, low plant investment and operation costs, at very competitive prices. Tharos krill oil quality achievements include phospholipids(PL)-enriched krill oil with >60% PL content, Omega3s close to 40% and astaxanthin up to 1.200ppm. All this obtained through a clean, solvent-free process, competitively operated that will offer the market a price-affordable krill oil. Why Tharos is expanding to other resources? It comes as a reply to a krill oil tonnage output bottleneck and a lack of a competitive price to the consumer. The South Antarctic krill oil still has a minor share of the annual output of this fishery, much less compared to other pelagic fish oils. Nonetheless, with less than 2% annual contribution of the South Antarctic krill production, it remains crucial for several fishing operations, contributing, in some cases, with around 40% of their annual revenue generation. Chinese share is still less than 6% in both indicators.

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Krill oil helps CAPEX intensive and complex at-sea operations to obtain some profit. And this is not monopoly of, for example, Norwegian operations that contribute to the market with well known krill oil brands. Krill oil has become a key part of the production matrix as all South Antarctic krill operations, without exception, see krill oil as a relevant way of making some profit. And this profit-generation ingredient comes tightly aligned with two other krill products that may look at odds with phospholipids-enriched krill oils; whole frozen krill and dried krill meal. Both combined contribute with more than 95% of the South Antarctic annual krill output:

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Whole#frozen# Meat# Meal# Food#Others#

Source: Tharos At-sea reports, fishing logbooks plus shared data from USSR operations 1976-2014

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Both products are manufactured on-board (at-sea) and later converted to krill oil, on-shore, primarily in USA, Canada, China, New Zealand and Israel, as every single krill oil is currently are manufactured onland using solvent-extraction processes. These rely on krill meal and/or frozen krill previously manufactured at-sea, and transported from far distances to onland premises where the oil is extracted. Some Chinese krill oil brands go further on an expensive spree, buying whole frozen krill oil that it is converted to dried krill meal (transformation done on-land) from where the oil is finally extracted. No matter how cost competitive Chinese are, this “triple-process” is expensive, and worst of all, the final oil quality can be severely compromised, and with it market acceptance and eventually the entire category jeopardized. Chinese companies that follow the “triple-path” has seen quality compromised in terms of freshness and a loss of crucial nutritional components. Being frozen krill and dried krill meal so important in the current krill oil value chain, incumbents and insurgents are revisiting their business model, precisely for these purposes. In order to evaluate where the krill oil market is heading to, visiting the dried meal and frozen krill is enlightening, whereas the former, at present, is less than half compared to the latter in terms of output tonnage.

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(*)

Aker, 450ton, 53% Olympic, 200ton,

24%

Enzymotec, 90ton, 11%

Neptune, 50ton, 6% Others, 50ton, 6%

Krill Oil (2015) (840 tons)

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Others Meal Oil

Source: Tharos Ltd. And Chinese operations are very well aware of this scenario. As previously reported by Tharos, China’s ‘Krill Project’ officially began in October 2010 when the Chinese State Ministry of Science officially launched its ‘863 Programme. The ‘863 Project is part of China’s Antarctic Ocean Living Resources Development strategy, and is the country’s most important step to become, if not the most important, one of the key players in the Antarctic krill fishery. Named ‘Rapid Separation of Antarctic Krill and Key Technology of Deep Processing’, its target is the exploitation and utilisation of South Antarctic krill. The project was expected to transform the Chinese offshore fishing industry and lead to the growth and development of the marine economy in Liaoning and Shandong provinces.

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But Chinese financial constraints put the brakes on this programme and it is now partly on Chinese krill operators hands on how to maximize revenues and profitability using the best available technologies to compete bis-a-bis with Western krill products. The Chinese Government has trimmed subsidies that helped Chinese krill operators survive. One Chinese operation, although it is fully state-owned, it is venturing on new krill presentations forced to generate profit and value creation, not pure subsidies. It is therefore not only how good the quality will be and how much krill meal tonnage (or frozen krill) will be manufactured. It is also a matter of survival on how to produce the best end product, be this meal, frozen or krill oil. China is not only focused to supply high quality krill products, but also on a larger volume to satisfy world demand for feed and oil extraction applications. And certainly their growing internal demand. Specifically on krill meal impact in the krill oil business, how far the expected krill meal supply growth will go also depends on the trend of krill oil demand and prices. Independently of krill oil extraction, krill meal has shown a renewed demand from feed formulators. European and South East Asian aqua-feed applications show a positive impact on krill meal demand. Tharos estimates that around half of krill meal might end up on shrimp feeds, subject that pricing is aligned to this species’ cost-competitive feeds formulations.

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(*)Marinefish=Yellowtail,Seabass,Seabream.Est.2012-2017Source: Tharos Ltd. Starter (aqua)feeds is an area of strong interest knowing krill meal special attributes. Comparison krill:fish meal has been done extensively, nonetheless it is revisited once more by feed manufacturers. Quality attributes comparison krill:fish meal as follows:

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KrillMealvs.FishMealAttributes

Krill meal prices do not necessarily have an insurmountable impact on the resulting krill oil price. Although South Antarctic krill operators target the highest krill meal (and frozen krill) prices, krill meal prices are only one part of the krill oil cost structure.

KRILLMEALPalatabilityLowmolecularweightcompounds=effectiveattractantandflavoringagent.AntioxidantPropertiesHighcarotene(asthaxanthin)contentandnaturaltocopherols.FluorideHighcontentofnaturalorganicfluoride.NaturalpigmentsIncreasefleshpigmentationoffarmedspecies.Actsasapowerfulantioxidant.SteroidalcomponentsGrowthpromotingagent.ChitinImmunesystemstimulantforsomefishspecies.LipidsSufficientOmega3fattyacidscontentintheformofphospholipids(goodbioavailability).UndesirablesubstancesLowcontentofDioxins,PCB’sandheavymetals.

FISHMEALPalatabilityLesseffective.

AntioxidantPropertiesNone.

FluorideLowcontent.NaturalpigmentsNone.

SteroidalcomponentsNone.

ChitinNone.LipidsSufficientOmega3fattyacidscontentintheformoftriglycerides(pooravailability).UndesirablesubstancesRiskofhighcontentsofDioxins,PCB’sandheavymetals.

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Tharos 10-year krill meal average price analysis (below chart) is close to USD2,5/k FOB. Frozen krill average price is USD0,85/k. Krill meals for oil extraction price range increases to USD2,65 to 3,60/k FOB. Tharos price predictive model indicates feed-grade krill meal prices to move in the range of USD1,95 to USD2,45/kilo Q1.16. Lower prices for 2015 production place krill meal prices bellow USD1,6 per kilo FOB.

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Using Chinese processing standards and above raw material prices, considering that the raw material cost is responsible of less than 3% of the final krill oil cost, krill oil extraction cost moves in the range of USD75-90/k for 40% phospholipids-enriched krill oils. This price is subject to several factors, among them the extraction yield, phospholipid content on original and final product, etc. Consequently, it is not krill meal/frozen krill prices the limiting factor of krill oil market success. These ingredients prices will not sever the oil market positioning, rather, in our opinion;

a) Krill oil final (high) prices. b) Krill oil containing solvent residues. c) The entire Omega-3 category market downturn. d) Phospholipids plus astaxanthin enriched marine and vegetable oils. e) Other competing marine oils made from fish-processing residues.

Regarding the Omega3 category, it has seen years with a market downturn as high as 7% year-to-year, on the back of;

a) Existing quality problems. b) Miss labelling, for example EPA and DHA declared values to be lower vs.

existing/real values. c) Poorly-designed research that debunks well analysed health claims impacting

customers confidence. d) Environmental constraints, with end users claiming that their Omega3

capsules help deplete the seas (something the krill oil industry feels most). These factors help explain current sales, in the vicinity of 850 tons per year (2015). Certain markets have seen demand trimmed up 50% year-to-year. The US remains the market leader, but China keeps adding households looking for ways to buy high-quality krill oil, at the lowest possible price, which today are mostly supplied by local production as import regulations refrain foreign brands. Although krill oil prices have been lately impacted, average price is still seen above USD100 per kilo with a window range starting at USD90 /k FOB. Low-quality, oxidized and blended material show lower prices. Chinese brands still lead on quality problems but expect this to improve.

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Chinese krill oil quality problems is not only a matter of processing issues, but also on the raw material used to extract the oil. Average-low quality krill meal is mostly what it is brought to market by Chinese operators as the market is limited to foreign unlicensed krill meal brands. Although Chinese krill oil will keep showing quality issues, Chinese players remain committed to bring updated technologies and, most importantly, the drive to achieve efficient operations and the highest possible quality of end products. Tharos sustain its previous opinion that for those involved in the Chinese krill industry, their target remains the fulfilment of domestic demand of around 3,000 tonnes of krill oil up to 2018. This demand is down to young middle class consumers who are concerned about their health and see krill oil as a novel alternative to accomplish this target. But price is the hurdle to overcome, as well as current Chinese financial worries which might take off 50% of the demand estimate. All in all the Omega-3 category has seen an impact in demand. Krill oil not being an exception. But Omega 3 players have shown a remarkable strength to fight back current market conditions. China for example remains adding new krill oil brands to the market. Several of them are of a lower quality, but overall quality standards keep improving. And there is confidence that the krill industry will strengthen itself backed by new technologies, products and business models. By Q1.2016 we will see how committed the krill fishing industry is once the body that regulates fishing for krill in the Southern Ocean, CCAMLR (Commission for the Conservation of Antarctic Marine Living Resources) updates the list of trawlers that will participate in the 2015-2016 South Antarctic krill fishing season1. As of December 2105, 10 trawlers from 3 countries appear registered vs. 7 trawlers from 4 countries working in the 2015 South Antarctic krill fishery. China will keep building its presence in the South Antarctic, as of today with four trawlers registered for the 2016 South Antarctic krill fishery and with it, the growth of strategic cities in China that will work in krill.

1 Season = December 1st 2015 to November 30th 2016.

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While Dalian, in Liaoning Province is currently China’s krill fishery centre, Qingdao, in Shandong Province, aims to become the base for one of the world’s largest integrated Antarctic krill industries. Qingdao has led the development of China’s krill fishing and processing industry and by the time this project is complete, Qingdao port will create over USD 1bn of annual output value. Market constraints, oxidized products and chemical residues brings the attention to Tharos model which is built on six pillars:

1. 100% Chemical-Free 2. 0% oxidation 3. Highest quality and PL content 4. Low processing cost and process plant investment 5. Environmental friendly 6. Multi-species – extended season process

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Tharos’ quality breakthrough comes from 4 distinctive patterns;

1) Process entirely made with fresh raw krill - The Tharos process occurs where the fishing operation takes place. See Tharos report “Why it is Better to Manufacture Phospholipid’s Enriched Krill Oils At-Sea”. Comparatively, all current processes extract krill oil from material that were previously manufactured at-sea (dried meals, frozen krill or a dried complex of lipids and proteins), and transported far to onland factories where the oil is extracted. Tharos’ max 4hrs processing time compares positively with current months’ time frame, either for Tharos’ crude or high-concentrated krill oil.

2) Low cost Process and Process Investment - Processing directly where the raw material is captured reduces significantly logistic costs and complexities, and the entire value chain costs. Consumers will profit from lower prices and the krill oil will access a wider category range.

3) No solvents – No explosion and handling risks. All current extraction processes use solvents at some point of their process. Tharos’ krill oil, once commercial, will offer 100% pure, 100% solvent-free krill oil. The term natural and organic can be added to the label.

4) Unique quality combination - From crude to concentrated krill oil; 5) Phospholipids (PL) up to 65%

a. Phosphatidylcholine(PC) above 42% b. Phosphatidylserine(PS) up to 3,0% c. EPA + DHA up to 40% d. Astaxathin up to 1.100mg/k (ppm)

6) Unmatched freshness parameters: a. Unique and characteristic fresh marine smell and flavor. b. Phosphatidylethanolamine(PE) up to 13%, as a pattern of high

freshness and no oxidation. c. High original astaxanthin content, as a pattern of high freshness

without oxidation. d. Very low ratio of Lysophosphatidylcholine/ Phosphatidylcholine

(LPC/PC), as a pattern of PL intactness. e. PL concentratoin of PL beyond 60% and Omega 3s above 40%.

More at http://www.tharos.biz/tharos-achievement-on-krill-oil-quality/.

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Tharos’ process cost structure allows that resulting krill oils to access a wider range of markets within the Omega 3 category vs. current krill oils are mostly sold.

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As the process works directly on site, for example on-board factory trawlers or where the operation takes place, and 100% solvent-free, it significantly reduces processing costs resulting in a clean krill oil suitable for an ample number of applications. It also reduces the carbon footprint and the impact to the fishing environment. Several companies keep working round the clock to come up with a solution that mimics Tharos’ solvent-free, highly cost efficient process. We think that our filed second IP will strength our portfolio while our third IP will expand beyond current quality boundaries.

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To help ease environmental organizations fear about South Antarctic krill overfishing, it is worth remembering that the total combined catch of krill in FAO statistical areas 48 and 58 of the South Antarctic, is limited to 8.7 million tonnes per year. Area 48 has an annual precautionary catch limit of 620,000 tonnes, and area 58 one of 3 million tonnes. However, since annual catches have averaged only 170,000 tonnes during the past decade, we do not see environmental risks to the South Antarctic krill fishery.