Global food and dairy firms milk China's safety fears
Source: Agencies |
June 19, 2012, Tuesday
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Print Edition
Print Edition
GLOBAL food and dairy companies are making another round of big bets on China's fast growing dairy sector, seeking to position themselves as safe alternatives after a lethal baby formula scandal burned the industry four years ago.
They are lured by projections of 10 percent annual growth for the sector and by Chinese consumers' willingness to pay a premium for foreign brands as they remain wary of local brands' safety records.
Just last week, China's top-selling dairy firm Inner Mongolia Yili Industrial Group Co recalled six months' worth of one brand of infant formula after government tests found it was tainted with mercury, a heavy metal that can cause neural damage if ingested.
The news has sent Yili's stock sliding 14 percent over the last two days to trade at 20.80 yuan (US$3.27) a share.
The latest foreign bet comes from Danish-Swedish dairy group Arla, which said on Friday that it would buy what amounts to a 6 percent stake in Yili's main competitor, China Mengniu Dairy Co, from private equity fund Hopu for 1.7 billion Danish crowns (US$289 million). The deal lifted Mengniu shares by 7 percent yesterday.
"If you have an international brand, then there's a premium in the market, because food safety is a concern," said Kevin Bellamy, dairy analyst at Rabobank in the Netherlands.
For some global milk producers, finding new markets is also crucial as they consolidate and expand production faster than their traditional, and mature, milk markets can grow.
Milk and formula safety became a deep concern for Chinese parents after a 2008 scandal in which at least six babies died and 300,000 were sickened from drinking milk formula contaminated with melamine, a chemical used in fertilizer and plastic.
But investing in China can mean risk to reputation for international dairy firms. In 2008, Arla, which already has a formula joint venture with Mengniu, had to reassure its international customers that it did not sell Chinese-produced products elsewhere, after production at the Chinese plant was temporarily suspended due to the melamine scandal.
In addition, Mengniu last year destroyed milk tainted with aflatoxin, a carcinogenic mould found in corn grown in humid climates.
"To be a minority shareholder in a food company in China, regardless of the quality of your partner, you're still exposed to the supply chain," said dairy consultant David Mahon, head of Mahon China Investment Management, referring to the Arla/Mengniu deal.
"The lesson from melamine would not have been learned, and that would be a pity."
China is the world's largest formula market and is expected to overtake the United States as the largest dairy market by 2020.
They are lured by projections of 10 percent annual growth for the sector and by Chinese consumers' willingness to pay a premium for foreign brands as they remain wary of local brands' safety records.
Just last week, China's top-selling dairy firm Inner Mongolia Yili Industrial Group Co recalled six months' worth of one brand of infant formula after government tests found it was tainted with mercury, a heavy metal that can cause neural damage if ingested.
The news has sent Yili's stock sliding 14 percent over the last two days to trade at 20.80 yuan (US$3.27) a share.
The latest foreign bet comes from Danish-Swedish dairy group Arla, which said on Friday that it would buy what amounts to a 6 percent stake in Yili's main competitor, China Mengniu Dairy Co, from private equity fund Hopu for 1.7 billion Danish crowns (US$289 million). The deal lifted Mengniu shares by 7 percent yesterday.
"If you have an international brand, then there's a premium in the market, because food safety is a concern," said Kevin Bellamy, dairy analyst at Rabobank in the Netherlands.
For some global milk producers, finding new markets is also crucial as they consolidate and expand production faster than their traditional, and mature, milk markets can grow.
Milk and formula safety became a deep concern for Chinese parents after a 2008 scandal in which at least six babies died and 300,000 were sickened from drinking milk formula contaminated with melamine, a chemical used in fertilizer and plastic.
But investing in China can mean risk to reputation for international dairy firms. In 2008, Arla, which already has a formula joint venture with Mengniu, had to reassure its international customers that it did not sell Chinese-produced products elsewhere, after production at the Chinese plant was temporarily suspended due to the melamine scandal.
In addition, Mengniu last year destroyed milk tainted with aflatoxin, a carcinogenic mould found in corn grown in humid climates.
"To be a minority shareholder in a food company in China, regardless of the quality of your partner, you're still exposed to the supply chain," said dairy consultant David Mahon, head of Mahon China Investment Management, referring to the Arla/Mengniu deal.
"The lesson from melamine would not have been learned, and that would be a pity."
China is the world's largest formula market and is expected to overtake the United States as the largest dairy market by 2020.
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