Premier Geoff Gallop named the ‘Broome pearl’ as a Western Australian icon last June and, as he lauded the contribution of the industry, said it generated $200 million in annual exports.
Premier Geoff Gallop named the ‘Broome pearl’ as a Western Australian icon last June and, as he lauded the contribution of the industry, said it generated $200 million in annual exports.
Many other people quote the same figure.
Yet the reality is that the value of WA pearl production fell to $120 million in 2002-03, according to the latest available data.
The industry, dominated by the wealthy and influential Paspaley and Kailis families, has always been shrouded in secrecy but it’s abundantly clear that the boom times and easy money are over.
Prices of many pearl types have fallen by 50 per cent or more over the past five to six years as weak demand, rising supplies and a rising Australian dollar cut returns to local producers.
These commercial pressures have added to the significance of a review, headed by marketing executive and West Coast Eagles chairman Mike Smith, of the industry’s tightly regulated structure.
The review presents a new opportunity for smaller producers, such as Nor-West Pearls and Clipper Pearls, to agitate for change, most notably through a lifting of quotas.
Former fisheries minister Kim Chance resisted earlier calls for change, which leaves the newly installed minister, Jon Ford, in the hot seat.
Nor-West Pearls managing director Kel Brown believes the market for white south sea pearls – the mainstay of the WA industry – has fundamentally changed as Asian producers, who are not encumbered by quotas, lift the volume and quality of their output.
“To continue to ignore the implications of this new and more competitive international trading environment means a continuing loss of benefits to the WA-based industry and the state,” Mr Brown said.
He is backed by Clipper Pearls general manager Alex Ogg.
“We are no longer the controlling country in terms of production levels,” Mr Ogg said. “And I wouldn’t want to bet that we can maintain our edge on quality forever.”
The industry has come to this point because of the growing prominence of hatchery production.
Traditionally, the industry relied on the harvesting of pearl oysters from the ocean floor.
The ‘wild stock’ shells were seeded and then transferred to a pearl farm for two years of cultivation, after which a pearl could be extracted.
The pristine waters and unique habitat in WA’s Kimberley region – combined with the substantial investment in farming technology by industry stalwarts like the Paspaley and Kailis families – gave local producers an unbeatable advantage in the global market.
Australia continues to produce the finest cultured pearls in the world and is pre-eminent at the premium end of the market.
“Our very best pearls sell for double the price of the very best pearls from elsewhere,” Bill Reed, of Broome retailer Linneys, said.
However, the emergence of hatchery production, which starts with artificial propagation of pearl oysters, has meant that white south sea pearls are now produced throughout the region.
Global production of white south sea pearls increased to about 2,000 ‘kan’ in 2002 (one kan equals 3.75 kilograms), according to industry magazine Pearl World.
Australian production was about 600 ‘kan’, or one third of the total, according to Pearl Producers Association executive officer Brett McCallum.
One response to the changing market is for Australian producers to focus even more effort on quality and branding, to differentiate the local product (see next article).
Mr Brown believes it is inevitable that we will see increased Asian production of ‘white’ pearls across a range of sizes, shapes and grades that are competitive substitutes for WA pearls, and says the best response is to lift hatchery quotas.
“This will allow producers like us to expand pearl hatchery production … to obtain economies of scale in the face of declining terms of trade and to improve profitability,” he said.
The State Government tackled these issues in 2002 when it reviewed the industry’s compliance with the National Competition Policy.
Former fisheries minister Kim Chance rejected recommendations to remove the hatchery quota system, citing “current international market conditions and lack of clear benefits that might arise from deregulation”.
(This was a reversal of the normal ‘burden of proof’ under National Competition Policy, which states that competitive barriers should be removed unless the benefits of regulation could be clearly proven.)
Mr Chance said at the time the government wanted to take a “more measured approach to deregulation”.
“The aim will be to free-up access to hatchery production of shell to new entrants and provide for allocation through market mechanisms, possibly by auction, after 2005,” Mr Chance said.
Alex Kailis, managing director of MG Kailis Group, which owns Broome Pearls Pty Ltd and Kailis Australian Pearls, believes that the industry has achieved success through the current formula and is concerned by demand for change by various parties, including voices without a significant stake in the industry.
“We believe regulation should continue in some form for the foreseeable future,” Mr Kailis said.
“Australia is the only place that can consistently produce high quality pearls; that is a unique quality offering and we need to protect that.”
Mr Kailis stresses that pearls are a luxury item and scarcity is part of that value proposition.
“When we are looking at changing production, either through the current system or easing regulations, we need to take that into account,” he said.
The MG Kailis boss said one of the issues was a perception that production was capped. He said this was not the case and analysis by his company shows that the industry production was growing by 15 per cent a year – a significant figure that he did not want to see increased.
In addition, talk of deregulation failed to recognise the big expense incurred over decades of developing the brands, markets and awareness of WA pearls.
Mr Kailis said any change in quota needed to be fair and equitable in its treatment of those who had developed the market. Any process of change had to be open and accountable – not just to the companies operating in the industry but also the employees and other existing stakeholders.
Peter Rogers, executive director of the Fisheries Department, said the current review was assessing all options.
This would include a review of how hatchery quotas were determined and how they should be allocated.
“It will set the direction for the industry for the next decade or so,” Mr Rogers said.
Under current rules, 572,000 wild stock oysters can be harvested for seeding each year.
Nobody in the industry is pushing to change the wild stock quota, which is based on resource sustainability.
In addition, 350,000 hatchery oysters can be seeded each year.
Sixteen licencees hold the entire quota in WA, although this figure is misleading because several producers hold more than one quota.
The company with the biggest stake in the industry is the Darwin-based Paspaley group, which operates about 20 pearl farms, holds four licences in WA and has 38 per cent of the total production quota in WA.
On the marketing side, it handles an estimated 60 per cent of Australia’s annual pearl output, through its own production and agreements with smaller producers
The second biggest producer is Perth’s MG Kailis Group, which entered the industry in 1974 and holds nearly 20 per cent of the WA quota.
Maxima Pearling Company, established in 1990, claims to be Australia’s third largest south sea pearl producer.
Another substantial player is Arrow Pearl Company, which has operations in both WA and the NT.
In addition, managing director Stephen Arrow is a director of listed pearl producer Atlas Pacific, which has farms in Indonesia.
The WA industry is closely linked to the NT industry, which is conducting its own review of pearling quotas.
Paspaley, Kailis and Arrow operate in both WA and the NT.
The fourth producer in the NT is a new entrant to the industry, Arafura Pearls, run by Perth accountant Andrew Hewitt and former Labor premier Peter Dowding.
Arafura has no wild catch quota and no presence in WA, opting instead for a hatchery-based operation in the NT. It plans to be the first domestic pearl producer to list on the Australian Stock Exchange later this year, and has appointed Azure Capital to manage the process.
Despite the small number of players and the use of quotas, the industry is far from static.
In recent years Kailis moved into the NT by investing in Tiwi Pearls, Maxima bought Cossack, and Clipper bought Dampier Pearls.
Mr Ogg said the Dampier acquisition doubled Clipper’s quota.
“That gives us the economies that we needed and satisfies our growth for the next three to five years,” he said.
Another industry move this year was Arafura’s purchase of additional NT quota from Toomebridge, owned by Broome’s Male family.
Mr McCallum said there has also been a big increase in joint venture activities, as producers worked together to enhance the efficiency of their operations.
He said the number of ships in the industry had been halved to five as a result of this process. Mr McCallum added that the industry was continuing to invest in animal husbandry and farming techniques.
As a result of increased efficiency and the progressive take-up of quota over the past decade, there has been a 1,400 per cent increase in WA production between 1983 and 2000.
Australian output is expected to increase further over the next few years, as the four producers in the NT reach full utilisation of their existing quotas.
This is cold comfort to people such as Nor-West Pearls’ Kel Brown.
“If there are benefits from restricting pearl supplies, then it is difficult to reconcile the rapid expansion in NT pearl production by the two major producers that also operate in WA,” he said.
“The view that this is a ‘controlled’ supply increase of Australian produced ‘white’ pearl in keeping with world demand growth simply precludes WA-based producers whose pearl production is constrained by hatchery quota and the state from the opportunity to participate in the benefits of that growth.”
Mr McCallum, whose job is to represent all producers, said the future policy direction was still an open question.
“I really think the jury is out on whether there is a need for additional quota,” Mr McCallum said.
“The main thing now is that we do have a formal process of review. In the past it has tended to be a bit ad hoc.”
Setting overall hatchery quotas is only the start of the review process.
A further question is how the quota is allocated. Should it be an administrative process, and if so should it be tied to overall production or continue to be on a pro-rata basis for all licencees?
An alternative view backed by treasury is that quota should be allocated by the market, by auction or a tender process.
As well as the quota review, the industry is also keen to see improved tenure for pearl farm sites (leases currently are renewed annually) and clearer ‘property’ rights for quotas.
Collectively, all of the matters now under review give Mr Ford, who is an unknown quantity in fishing circles, plenty of opportunity to stamp his mark on the industry.
Pearl Quotas
The white south sea pearl industry is controlled by quotas. In WA, the quota is allocated to 16 licencees.
- 572,000 wild stock oysters can be harvested each year.
- 350,000 hatchery oysters can be seeded each year.
- Much of the wild stock quota is transferred to hatchery production.
- Annual output is worth between $120m and $190m.
- In the NT, there are four producers.
- 420,000 pearl oysters can be seeded each year (but the full quota has not been utilised).
- Annual output is worth $19m.\
Source: Department of Fisheries
Pear Producers
- WA’s white pearl industry has nine producers, who hold 16 licences.
- Paspaley Pearling Company, based in Darwin, is the biggest producer. It holds four WA licences and has 38% of WA quota and 20% of NT quota.
- MG Kailis Group (Broome Pearls). Holds three WA licences and has 19% of WA quota and 20% of NT quota.
- Maxima Pearls. Holds two WA licences after buying Cossack, and claims to be the third largest producer.
- Clipper Pearls. Holds two WA licences after buying Dampier Pearls in 2004.
- Arrow Pearl Company. Operates in WA and the NT (with 20% of the quota).
- Blue Sea Pearling.
- Cygnet Bay.
- Morgan & Co.
- Nor-West Pearls.
- Arafura Pearls is a new producer in the NT. Recently doubled its quota to 80,000 units (20% of total).