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Bad times in store for China's dairies

By Jin Jing | February 13, 2009, Friday | Print Edition

THE latest string of safety concerns over products made by major domestic dairies may delay the recovery of the dairy market, which was battered by last year's tainted milk scandal, analysts said.

China's quality supervisor recently ordered Inner Mongolia Mengniu Dairy Co to prove the safety of OMP, an additive, before using it in its milk products. Experts said consuming high levels of OMP, a milk protein, might lead to higher cancer risks.

Additionally, food-and-mouth disease has been found at a cattle farm owned by Shanghai-based Bright Dairy Co in Fengxian District. About 440 cows in the cattle farm have been culled.

Dumex, the powdered-milk brand owned by France's Danone Group is also under investigation after allegations its products contaminated with the industrial chemical melamine. Forty-eight Chinese infants were reported to have suffered kidney illnesses after drinking Dumex milk powder.

"After the tainted milk scandal last year, dairy consumption has recovered quite quickly to nearly 80 percent of its previous levels," said Yan Yalei, an analyst from Bohai Securities. "But new milk safety problems will make it harder for consumers to rebuild confidence, and the market rebound will slow down."

The tainted milk scandal, which killed six infants and sickened almost 200,000, triggered a sales slump for Chinese dairy products on the domestic and international markets.

Mengniu warned it will probably record losses of 900 million yuan (US$131 million) for last year, compared to a net profit of 583 million yuan in the first half of the year. Its shares yesterday fell 3 percent to HK$9.79 (US$1.26).

Huang Mao, an analyst from Guosen Securities Co said the current tough situation could give a boost to smaller manufactures and speed up industrial consolidation.

"The safety problems caused huge losses among leading market players, providing opportunities for smaller dairies," he said. "Government-backed companies will have greater advantages."

China's New Hope Group has announced it will spend 64.5 million yuan to raise its stake in Kunming Xuelan Milk Co to 93.9 percent from 42.9 percent. Kunming Xuelan is the biggest milk producer in Yunnan Province.

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