The Norwegian salmon industry has during 2H 2012 been at full capacity utilization. In combination with advanced 2H2012 harvesting and subsequent fallowing of sea water capacity in 2013, we conclude that Norwegian supply for the first time in history will turn negative. Markets will turn even tighter than what had otherwise been the case. Simultaneously the Chilean growth for 2013 is most likely coming sharply down from very high 2012 levels. With all other major regions stable or contracting, we expect global supply to fall by around 3% in 2013 before stabilizing in 2014. This significant shift from global supply growth of 22% in 2012 should, in combination with strong demand, lay the foundations for a long positive cycle.

We increase our 2013 and 2014 salmon price expectations to NOK 33 (32.50) and NOK 33.3 (33) per kilo. We forecast prices to climb 19% for 2013. With expectations of a long positive cycle generating strong cash flow and dividend capacity, we maintain our positive view of the sector and calculate significant upside in several of the shares. We continue to prefer geared players with high upstream exposure. Our sector top picks are Cermaq ASA and Marine Harvest ASA, while some of the small/medium sized players could be potential takeover targets well above current share prices. The table below, and the company specific analyses later in this report, provide more details.

Eoin Treacy's view My view – As a boy I remember curling up in the bow of my uncle's boat on cold January afternoons as we trolled the lakes for salmon using copper spoons and rapalas as lures. The monotony was relieved only by the scenery and the prospect of hearing the reels sing. We'd wait all day for the chance to play a salmon or two but it was worth it. I'll never forget the day that a 12lb salmon literally jumped into the boat. Back then there were still a few people on the lake who made a living from salmon fishing but even then it was a marginal business and the advent of farmed fish quickly made it totally uneconomic.

As demand for salmon globally remains on a growth trajectory and supply is likely to be curtailed by what appear to be cyclical factors, this may lend a tailwind to the sector over the next couple of years.

Marine Harvest has held a progression of higher reaction lows since October 2011 and has been consolidating above NOK5 since December. A sustained move below NOK4.75 would be required to question medium-term scope for additional upside.

Cermaq broke successfully above the psychological NOK85 earlier this month and a sustained move below NOK80 would be required to question medium-term scope for additional upside.

Both Leroy Seafood and Salmar accelerated out of their respective bases from November and are becoming increasingly susceptible to reversions towards the mean. However sustained move below their respective 200-day MAs would be required to check medium-term recovery potential.