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Chinese company Sanlu Group, in which Fonterra owns a 43 per cent stake, has recalled milkpowder linked to babies falling seriously ill in China.
The South China Morning Post today reported Sanlu Group admitted it had found the chemical tripolycyanamide in its infant formula.
Sanlu-branded milkpowder has been linked to babies in seven Chinese provinces falling seriously ill with kidney stones, but until now Sanlu had claimed the problem lay with counterfeit product.
The same chemical was found in tainted pet food that sickened or killed thousands of dogs and cats in 2007. The chemical can be used to manufacture fertiliser and melamine plastics, but also has a high nitrogen content which increases the apparent protein levels when foods are tested for nutritional value.
"We have been advised that Sanlu has had a quality issue in its products as a result of receiving defective milk in China," a Fonterra spokesman said.
"Sanlu has advised us that they have recalled product in China and have put new milk quality testing procedures in place.
"We are pushing hard to make sure that Sanlu is working closely with the Chinese Government to ensure that everything that can be done, is being done.
"Our first priority is ensuring that the welfare of consumers is being put first".
Sanlu is reported to be recalling all infant milk powder products made before August 6 - an estimated 700 tonnes.
Fonterra said it understands the contaminated product is only sold in China, though Sanlu exports a small amount to Taiwan.
Sanlu's statement did not say whether it was sabotage or contamination during the manufacturing process. Chinese health authorities are investigating cases of kidney stones and renal failure in babies in Shaanxi, Ningxia, Henan, Shandong, Hunan, Hubei, Jiangsu, Anhui and Hubei in the past two months.
All the patients had been fed Sanlu milkpowder, the South China Morning Post said.
China's Administration of Quality Supervision, Inspection and Quarantine said it had started testing samples of all formula brands, sent investigators to the affected provinces and ordered a national campaign to test the quality of infant milk products.
So far this year, the health department in Gansu had seen 59 kidney stone cases in infants. Most of them live in rural areas of the province. There were no such cases last year or in 2006.
Department spokesman Yang Jingke said the administration started investigating in mid-July when a hospital reported a significant rise in kidney stone cases involving babies fed the same formula. He said there were 16 cases in the first half this year.
Mr Yang was quoted by Xinhua as saying that all the babies were aged five to 11 months, most were from rural areas and some had developed renal failure. Six milk powder samples they used have been sent to national laboratories for testing.
Reports quoted doctors as saying the patients all suffered from rare acute renal shutdown, an enlarged kidney and vomiting.
The US Food and Drug Administration warned consumers on Thursday to avoid buying all infant formula imported from China, citing reports of babies in that country who have fallen ill with kidney problems after consuming suspect formula.
- NZPA
