China crisis to spur formula growth

Benefits for local producers as China tightens its rules on infant formula. Photo / Chris Miller

Local producers see a benefit for them as China tightens its rules around infant formula, writes Christopher Adams

Two of New Zealand's largest dairy processors, Synlait and Westland Milk Products, say a raft of new rules governing China's infant formula trade could boost their businesses in the world's biggest baby milk market.

The Chinese Government announced the measures late last month which include shutting down domestic formula manufacturers that can't guarantee the quality of their raw milk and prohibiting the bulk importation and repackaging of infant formula in China. Foreign baby milk makers will have to register with the Chinese authorities before exporting product to the country and infant formula will soon be regulated in the same way as pharmaceutical products, with an electronic tagging system introduced in order for the production process to become more traceable.

China's new leadership, which took power in March, has its sights set on rebuilding the country's domestic infant formula industry decimated by the 2008 melamine crisis. Six babies were killed and around 300,000 became sick after the toxic industrial chemical was illegally added to dairy products, and many Chinese parents are yet to regain their trust in locally made baby milk.

Westland Milk Products chief executive Rod Quin says the changes increase the Hokitika-based firm's opportunities to market its products in China. "Our information is that the Chinese government will not restrict total imports, but will tighten up on who brings product into China," says Quin, whose company is the country's second biggest dairy co-operative after Fonterra. "This will benefit New Zealand dairy companies that process and pack outside of China, and exclude marketing companies that are not involved in any actual processing."

Westland, which has around 330 farmer shareholders who are mostly based on the West Coast, will launch its West Pro Nutrition business-to-business brand at an event in Shanghai later this month. West Pro will provide Chinese customers - companies rather than consumers - with infant formula produced at its $25 million paediatric nutrition plant on the West Coast that was commissioned earlier this year.

While the bulk importation of infant formula is set to be prohibited under the new rules, both Westland and Synlait say the ban will only apply to completely finished baby milk.

"From what we understand, the importation of bulk nutritional base powders where other components are blended in China before packing is permitted," Quin says. "Westland exports bulk nutritional base powders and that is why we see opportunities for growth with this new ruling."

The cooperative is going to have a full-time employee based in China, he adds, who might be the first of several staff based in the Asian superpower.

"It's about a commitment to China and a commitment to understanding what the Chinese Government and Chinese consumers expect from a quality food supplier."

Synlait, which will carry out an initial public offering on the NZX this month designed to raise up to $120 million, already produces a baby milk brand - Pure Canterbury - marketed in China by its majority shareholder, Bright Dairy. The Canterbury-based dairy processor also exports formula base powder to China. Synlait chief executive John Penno says the company is supportive of the changes being made in the Chinese formula trade. "Anything they can do to drive quality into the industry we see as very good from our point of view, particularly for us because we feel that we are part of that play with a large Chinese shareholder."

Penno doesn't think the Chinese Government's plans to rebuild its domestic formula industry present a challenge to New Zealand exporters.

"I think we continue to have a strong future and I don't think there's any significant threat from them continuing to rebuild their infant formula industry locally," Penno says. "We've got an FTA [Free Trade Agreement] in place with zero tariffs and a good reputation in China in terms of brand New Zealand."

China's Premier, Li Keqiang, revealed in May that Beijing would step up monitoring of imported formula and "nurture" the development of domestic brands, including through the restructuring of Chinese dairy corporations.

Government-backed China Mengniu Dairy's US$1.6 billion offer to purchase of Yashili International, a Hong Kong-listed baby milk maker that is going to spend more than $200 million establishing a plant here, is one of the first examples of that restructuring.

Quin says doing business in China doesn't come without its risks. "But it also comes with rewards and in market demand scenario continues to grow."

The Chinese infant formula market is predicted to double to US$25 billion by 2017, partly as a result of reduced breastfeeding as increasing numbers of mothers enter the workforce, according to market research firm Euromonitor.

NZ infant formula exports are estimated to be worth $600 million annually, with around $170 million of that going to China, according to Food Safety Minister Nikki Kaye. They have grown rapidly in the wake of the 2008 melamine scandal as demands for imported brands skyrocketed.

But the sector has had a rocky ride this year with China's state-run CCTV broadcasting critical stories about NZ baby milk products, which raised questions about manufacturing processes and false claims some brands were making in Chinese marketing.

Talking to TVNZ's Q&A programme last month, Trade Minister Tim Groser admitted that this country wasn't keeping up with developments in its trade relationship with China. "When you have exports triple in five years you've got to ask yourself, 'Are we running fast enough to keep up with these developments?' And I think the answer is no - we've some more work to do," he said. "I think we are in reasonable shape but there is a broader challenge out there and we've got to lift our game."

Until recently, the Ministry for Primary Industries hasn't even been able to say how many infant brands are being exported to China as it only regulated manufacturers that produce hundreds of brands - many with Chinese links - under contract. However, last month the Ministry announced a new requirement that contract manufacturers must register information about the brands they produce with the department.

While China remains the world's biggest infant formula market, Quin stresses the global formula growth story doesn't solely belong to the Chinese. "There will be a Southeast Asian story that we want to become part of as well," he says. "Our market reports suggest the formula market will grow at 70,000 to 80,000 tonnes per year and New Zealand securing a share of that growth is an opportunity that we really need to chase hard."

• Christopher Adams is a Herald Business writer