Live, Chilled and Frozen Meat (Sheep) Trade, GCC

Market study focused on the UAE, Kuwait, Qatar and Bahrain

April, 2011

Prepared For The World Society for the Protection of Animals

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About this report Market Vision has been commissioned by the World Society for the Protection of Animals (WSPA) to undertake a research study to understand the intricacies of the Australian live sheep, chilled and frozen sheep meat trade in select Gulf Cooperative Council (GCC) countries. The purpose of the study is to understand how the chilled and frozen sheep meat trade can be promoted in the GCC. To initiate a change from a live sheep trade to a chilled and frozen sheep meat trade in the GCC, it is necessary to understand some key issues that would help make informed decisions and take the necessary steps forward in bringing about that change. These include: Statistics on available refrigeration capacity in these markets to support a shift to chilled and

frozen sheep meat trade An analysis of tariffs and subsidies applied to the trade An economic analysis of live sheep versus chilled and frozen sheep meat trade from the

importers’ point of view, and An understanding of the extent of slaughtering of Australian sheep by private buyers versus in

abattoirs This report is aimed to provide a detailed understanding of and insights into these key issues in the GCC, with a focus on the United Arab Emirates (UAE), Bahrain, Kuwait and Qatar. These countries were chosen due to logistical considerations and the high level of live export to them from Australia. The findings of the study presented in the report are based on analysis of secondary and primary research undertaken in the GCC during the months of January – March 2011.

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Executive Summary Market Vision has been commissioned by the World Society for the Protection of Animals (WSPA) to undertake a research study to understand the intricacies of the Australian live sheep, chilled and frozen sheep meat trade in select Gulf Cooperative Council (GCC) countries.

Contextual background GCC countries account for the majority share of all live sheep exports from Australia. In 2010, live sheep exports worldwide from Australia totalled 2.98 million, of which 76% were to the GCC. UAE, Bahrain, Kuwait and Qatar accounted for 67% share of all live sheep exports from Australia. Figure ES1 Australian sheep exports by country of destination, 2010; volume and share %

Data source: Australian Bureau of Statistics (2011) In the GCC, with the exception of the UAE, local governments heavily subsidize Australian live sheep. Live sheep, fresh and chilled meat are exempt from customs duty while frozen sheep meat attracts a 5% customs duty. To initiate a change from a live sheep trade to a chilled and frozen sheep meat trade in the GCC, it is necessary to understand some key issues that would help make informed decisions and take the necessary steps forward in bringing about that change. These include: - Statistics on available refrigeration capacity in these markets to support a shift to chilled and

frozen sheep meat trade - An analysis of tariffs and subsidies applied to the trade - An economic analysis of live sheep versus chilled and frozen sheep meat trade from the

importers’ point of view, and - An understanding of the extent of slaughtering of Australian sheep by private buyers versus in

abattoirs This study was aimed to provide a detailed understanding of and insights into these key issues in the GCC, with a focus on the UAE, Bahrain, Kuwait and Qatar. These countries were chosen due to logistical considerations and the high level of live export to them from Australia.

1,076,455

498,731

321,415

78,747 69,073

215,038

709,112

Kuwait Bahrain Qatar UAE Oman Saudi Arabia

Other World

Kuwait, 36%

Bahrain, 17%

Qatar, 11%

UAE, 3%

Oman, 2%

Saudi Arabia, 7%

Other World, 24%

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Key findings of the study Refrigeration capacity in the GCC GCC countries rely heavily on imported foodstuffs as they have limited agriculture and

domestic food processing - over 80% of food requirements are met through imports. As a result, these economies have, over the years, developed substantial refrigeration capacity for the import of chilled and frozen food products.

It is to be noted that refrigeration is also required for other product categories such as

vaccines, healthcare, flowers and other perishable foods that are also sourced by these nations from overseas markets.

Total capacity of refrigerated warehouses in the GCC is estimated at about 19 million cubic

meters (cbm) in 2010, of which about 2.4 million cbm is estimated to be public warehouses (for hire) capacity.

The ratio of public warehouses capacity to urban population in the GCC as a whole, at 0.074

cbm per urban resident compares well with other countries from around the world. Table ES1 Public refrigerated warehouse capacity, by country, 2010

Country Million cbm Per urban resident

Japan 82.144 0.338 USA 28.809 0.331 Germany 15.300 0.254 China 54.076 0.085 GCC 2.350 0.074 Chile 1.010 0.066 Brazil 5.429 0.032 Mexico 1.630 0.019 India 0.460 0.001

Data source: International Association of Refrigerated Warehouses (2010); GCC date source: Market Vision Refrigeration capacity in the UAE, Bahrain, Kuwait and Qatar Total refrigeration capacity in the UAE, Bahrain, Kuwait and Qatar is estimated at about 7

million cbm, of which about 1.1 million cbm is estimated to be public warehouses (for hire) capacity.

The ratio of public warehouses capacity to urban population in these four countries, at 0.128

cbm per urban resident is indicative of a higher level of development of the refrigerated warehouse industry in these markets, relative to GCC overall, and better market penetration than in a country like China (see Table ES1).

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Figure ES2 Refrigeration capacity in UAE, Kuwait, Qatar and Bahrain, total and share of public versus private sector warehouse capacity, 2010 (cubic meters)

Data source: Market Vision There are many international, regional and local companies offering temperature controlled

warehousing in these GCC countries such as Agility Logistics, GAC Logistics, Gulf Warehouse Company, Refrigerated Industries and Storage Company (RISCO) and Al Futtaim Logistics.

In addition, there is substantial cold store facility at the major sea ports and airports in these

countries, with massive additional planned capacity in the coming years. Many of the leading importers, distributors, food processors and retailers in these countries

maintain in-house state-of-the-art warehouses fully equipped with temperature control systems, and also maintain their own fleet of refrigerated vehicles for transportation of food products.

Refrigerated transportation is also offered by a large number of privately held transport

companies, and some integrated companies that have refrigerated trucks to complement processing and storage operations. Trucks are used for chilled and frozen food distribution to local markets as well as for long haul transportation, to regional export markets.

It is estimated that the UAE, Bahrain, Kuwait and Qatar currently have a total of about 54,000

refrigerated road transport vehicles. Table ES2 Estimated number of refrigerated road transport vehicles, by country, 2010 Country Number of refrigerated transport vehicles UAE 20,000

Kuwait 13,000

Bahrain 10,000

Qatar 11,000

Data source: Market Vision

3,105,000

1,533,333

1,150,000

766,667

UAE Kuwait Qatar Bahrain

621,000184,000 138,000 115,000

2,484,000

1,349,3331,012,000

651,667

UAE Kuwait Qatar Bahrain

Public Sector Private Sector

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Refrigerator ownership in consumer households in the UAE, Bahrain, Kuwait and Qatar is near universal at 99.5%. Freezers also have a high penetration (73%) among consumer households in these countries.

The past few years have seen strong growth in the number of hypermarkets and

supermarkets across the GCC countries, led by an increased demand for retail food, led by growth in population, high individual spending power, an import-reliant food trade, and a huge expatriate population which requires a diversified supply of food products.

It is estimated that there are over 1,400 hypermarket and supermarket stores, including cooperative stores across the GCC. On an average, about 10% of store space in these outlets is earmarked for refrigerated areas; of this about 20% (2% of total store size) tends to be for meat, fish and poultry.

Tariffs and subsidies on imports of live sheep, chilled and frozen sheep meat The GCC countries have adopted a Customs Union wherein customs duties and trade

restrictions among the constituent states are abolished, and wherein common customs duties and external trade regulations are implemented.

Under the GCC Customs Union, live animals, fresh and chilled meat are exempt from customs

duty while frozen meat products are charged a 5% customs duty. Estimations of tariff revenues to the individual GCC countries from the import of frozen

Australian sheep meat in 2010 indicate that this tariff does not bring significant revenues to the governments. The total amount paid in tariffs for the frozen meat trade to the governments of UAE, Bahrain, Kuwait and Qatar in 2010 is estimated at about US$2.8 million.

Table ES3 Estimated tariffs paid for Australian frozen sheep meat, by country, 2010 (US$ million)

Country Australian frozen sheep meat imports1 (tonnes)

Tariff value2 (US$)

UAE 13,021 1,750,022

Kuwait 4,402 595,370

Bahrain 3,250 440,700

Qatar 88 11,871 1Data source: D.A.F.F (2011) Note: Frozen sheep meat data includes data for frozen mutton and lamb 2Data source: Market Vision Note: These tariff figures are estimates only (by Market Vision), and may vary from actual tariffs paid to the individual governments in 2010 The governments of individual GCC countries subsidize various food products to make them

more affordable for the local population. Live Australian sheep meat is subsidized in Bahrain, Kuwait and Qatar. Subsidies granted are only given for those sheep that are slaughtered domestically. The subsidy is on the slaughter price.

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The UAE government does not subsidize live Australian sheep. It is estimated that the total subsidies paid by the governments of Kuwait, Bahrain and Qatar

for live Australian sheep in 2010 were of the order of about US$249 million. Table ES4 Estimated subsidies paid for live Australian sheep, by country, 2010 (US$ million)

Country US$ million Kuwait 137

Bahrain 74

Qatar 38

Data source: Market Vision Note: These subsidy figures are estimates only, and may vary from actual subsidies paid by the governments in Kuwait, Bahrain and Qatar Economic cost analysis of live sheep versus chilled and frozen sheep meat trade In order to make informed decisions about how to promote/encourage chilled and frozen

meat imports among importing countries, an economic cost analysis of live sheep versus chilled and/or frozen meat trade was undertaken from the importers’ point of view.

The detailed elements of cost associated with importing live sheep versus chilled and frozen

meat differ, but broadly fall under four main categories: landed cost of product, local storage and transportation costs in importing country, marketing costs and other costs.

While live sheep from Australia is typically transported via sea transport that is more

economical than air freight that is used for importing chilled sheep meat from Australia, analysis shows that the landed cost for live animals versus chilled sheep meat from Australia do not vary significantly. This is due to additional in-transit costs associated with importing live sheep including cost of a veterinarian on board the ship, food and water for the sheep, and loss of sheep by death in-transit (estimated at 1% of load).

The landed cost of imported frozen sheep meat also points to marginal differences when

compared with the landed cost of live sheep. Therefore, it may be argued that there is no significant cost advantage to importers in the

UAE, Kuwait, Bahrain and Qatar from importing live animals versus chilled and/or frozen sheep meat.

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Table ES5 Landed cost of live Australian sheep versus chilled and frozen sheep meat, in importing country, 2010 (US$ per kg)

Country Live sheep meat (US$ per kg)

Chilled sheep meat (US$ per kg)

Frozen sheep meat (US$ per kg)

Bahrain Landed cost 7.75 8.75 7.88

Kuwait Landed cost 7.53 8.50 7.64 Qatar Landed cost 7.31 8.25 7.43 UAE Landed cost 6.99 7.90 7.06

Data source: Market Vision Note: Landed cost per kg for live sheep meat is computed on basis of average 22 kg of meat per sheep head While importing live sheep entails additional costs of transportation to slaughter house and

slaughtering, chilled and frozen sheep meat trade benefits importers in that there are no such costs associated with sheep meat trade. Marketing and all other costs are about the same for live sheep, chilled and frozen sheep meat trade.

Despite the obvious additional costs associated with the live sheep trade, a comparative

analysis of average retail selling prices of live sheep meat versus chilled and frozen sheep meat products shows that there is substantial difference in average retail selling prices (higher retail price) of chilled and frozen sheep meat versus that of live sheep meat in markets where freshly slaughtered Australian sheep meat is sold at subsidized rates in Kuwait, Qatar and Bahrain.

On the other hand, the average retail selling prices of fresh, chilled and frozen sheep meat do

not differ significantly in the UAE, where Australian live sheep meat does not benefit from subsidies.

Table ES6 Retail sale price of live Australian sheep versus chilled and frozen sheep meat, by country, 2010 (US$ per kg)

Country Live sheep meat (US$ per kg)

Chilled sheep meat (US$ per kg)

Frozen sheep meat (US$ per kg)

Bahrain Retail Price 2.65 11.93 10.21

Kuwait Retail Price 3.57 10.03 9.70 Qatar Retail Price 3.98 10.98 9.75 UAE Retail Price 6.99 7.90 7.06

Data source: Market Vision It would appear that the resulting lower retail price for fresh meat from live Australian sheep,

on account of government subsidies, promotes demand substantially in Kuwait, Qatar and

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Bahrain, when compared with the higher retail prices for chilled and frozen sheep meat that do not benefit from such subsidies.

Demand for Australian chilled and frozen sheep meat would likely increase if similar subsidies

as for live sheep meat were considered for chilled and frozen sheep meat. Extent of slaughtering of Australian sheep by private buyers in-home versus in abattoirs In the GCC, live sheep are on-sold from feedlots to private buyers throughout the year.

Legally, private buyers should take the purchased sheep to a slaughterhouse/abattoir for slaughter; however, it is understood that instead, some buyers opt to slaughter the sheep outside the abattoir/at home.

Based on observation visits to livestock markets and abattoirs, and discussions with sheep

sellers, it is estimated that, on average, two-thirds (66%) of live Australian sheep are sold daily to commercial/corporate buyers, while one-third (34%) is sold to private buyers in the UAE, Kuwait, Bahrain and Qatar through the year. The proportion of in-home slaughter versus slaughter at abattoirs by private buyers varies from country to country.

In the UAE, it is estimated that 16% of private buyers opt to take the live sheep home for

slaughter while in Kuwait this proportion is estimated to be much higher at 37.5%. In Qatar and Bahrain, the proportion of private buyers purchasing the live sheep for in-home slaughter is estimated at 25% and 30% respectively.

Table ES7 Estimation of slaughtering of Australian sheep by private buyers in-home versus in abattoirs

Country

Proportion of average daily sales of Australian live

sheep

Of sales to private buyers, proportion

taken to:

Proportion of total Australian live sheep slaughtered daily in

abattoirs To commercial

buyers To private

buyers

UAE 75% 25% Abattoir 84% 96 %

Home 16%

Kuwait 60% 40% Abattoir 62.5% 85%

Home 37.5%

Qatar 60% 40% Abattoir 75% 90%

Home 25%

Bahrain 60% 40% Abattoir 70% 88%

Home 30%

Data source: Market Vision

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It is understood that, despite the law prohibiting slaughtering of animals outside the abattoirs, during festival times such as Ramadan and Eid (especially Eid Al Adha – the Festival of Sacrifice), the proportion of in-home slaughter can rise two-fold compared to the proportion slaughtered in-home during other times of the year. In part, this is due to the religious practice of animal sacrifice, and in part due to anticipated delays at official slaughterhouses / abattoirs to get the sheep slaughtered.

Conclusions of the study GCC countries rely heavily on imports to meet their food requirements. Over the years,

substantial refrigeration capacity has been developed in these countries to support the import of foods that require refrigeration.

Per capita capacity of public refrigerated warehouses in the GCC is indicative of a fairly high

level of development of the industry comparable with countries from around the world. Planned expansions by key industry players will further boost market penetration of public refrigerated warehouses.

It is felt that the available refrigeration capacity in these markets will likely be able to support

additional quantities of chilled and frozen sheep meat imports, which would support a shift from live sheep trade to chilled and frozen sheep meat trade.

Ownership of refrigerators in consumer households in the GCC is near universal (99.5%).

There is also a high level of penetration of freezers in consumer households (73%). The economic cost analysis of live Australian sheep versus chilled and frozen sheep meat

shows that the average retail selling prices of fresh, chilled and frozen sheep meat do not differ significantly when Australian live sheep meat is not subsidized by local GCC governments as in the case of the UAE.

In Kuwait, Qatar and Bahrain, where Australian live sheep meat is subsidized, there is

substantial difference in average retail selling prices (higher retail price) of chilled and frozen sheep meat versus that of live sheep meat (lower retail price), likely promoting substantial demand for fresh meat from live Australian sheep.

Demand for Australian chilled and frozen sheep meat would likely increase if similar subsidies

as for live sheep meat were considered for chilled and frozen sheep meat. On average, about two-thirds of live Australian sheep are sold daily to commercial/corporate

buyers for local processing and onwards sales in the UAE, Kuwait, Qatar and Bahrain. With ongoing growth in the food processing, food service and retail sectors in these economies, there is opportunity to grow exports of chilled and frozen sheep meat directly from Australia to these industry segments.

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