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 Chinese drinks maker Want Want <0151.HK> has said it plans to reduce
imports to diversify its supply chain, and at least two
multinational infant formula sellers have either cut supply from
Fonterra or plan to diversify supply for the China market, people in
the industry told Reuters.
A drought in New Zealand earlier this year curbed milk powder
production, highlighting the risk of over-reliance on one supplier.
Those concerns escalated in August when Fonterra said it had found a
potentially fatal bacteria in one of its products, triggering
recalls of infant milk formula and sports drinks in several markets,
including China. Tests later found the initial finding was
incorrect.
"They know they're reliant on 80 percent of their imported milk
powder from one place — and 80 percent of that from one company.
That's just not a healthy position to be in," said William Baker, a
Beijing-based investment professional who focuses on the Chinese
dairy industry.
China's appetite for foreign milk powder has soared in recent years,
spurred by distrust in local products since a scandal in 2008 when
milk laced with the industrial chemical melamine killed six infants
and made thousands more ill. Tighter food safety rules and disease
among Chinese cattle have also stymied domestic output this year,
pushing import volumes up by almost a third in January-October.
Fonterra said it was normal that some fast growing customers would
look around for other supply options.
"When you've got customers who are growing like mad, it's not so
much that they're wanting to diversify, it's that they know that if
they're growing faster than we are, they're going to have to see
volumes of product coming out of Europe and the U.S. to fill what
would be a supply gap," said Tim Deane, director of global sales at
Fonterra."
"As growth in global trade outstrips New Zealand supply,
increasingly more companies will have to (look at different
suppliers). It's got nothing to do with their satisfaction or
dissatisfaction with Fonterra."
"WARM WELCOME"
Abbott Laboratories <ABT.N> and Mead Johnson Nutrition Co <MJN.N> of
the United States, Danone SA <DANO.PA> of France and Switzerland's
Nestle SA <NESN.VX> are among the major sellers of infant milk
formula in China.
They buy base milk powder from Fonterra to process into infant milk
formula for sale in China's $12.4 billion market, the world's
biggest. Earlier this year, Fonterra began selling its own infant
milk formula brand in China on a pilot basis.
Supplying more than 60 percent of global whole milk powder exports,
New Zealand has long dominated China's import market, accounting for
an average 80-90 percent of total powder imports each month since
2009. But in June, even before Fonterra's food safety scare, imports
from other countries surged, especially from Europe and the United
States. By September, they made up more than half of all shipments,
Chinese customs data showed.
While heavy demand lifted New Zealand powder imports in October,
imports from elsewhere are rising fast, jumping 53 percent in the
year to October, almost twice the pace as those from New Zealand.
"Any non-New Zealand supplier turning up in China is getting a warm
welcome," said John Shaskey, New Zealand-based executive director of
dairy broker Global Dairy Network.
One large U.S. infant formula firm plans to increase the proportion
of supply it gets from Europe, especially Ireland, a person with
direct knowledge of the plan said, adding he didn't want his or the
firm's name to be used as the decision has not yet been finalized.
He declined to name any specific suppliers.
Any new demand in the fast-growing market will likely be sourced
from Europe, he said. The company currently gets around 60 percent
of its milk powder used in China from New Zealand.
Mead Johnson, the largest infant formula seller in China by market
share, according to Euromonitor, declined to comment. A spokesman
for Abbott said he was unable to discuss supplier contracts.
[to top of second column] |
Danone's Dumex milk powder unit has cut its supply from Fonterra for
the Chinese market due mostly to lower production in China since the
August health scare, said a person with knowledge of that situation.
Officials from Danone, which has said it is considering legal action
against Fonterra over the impact of the food scare on its China
sales, declined to comment. Nestle, which operates the Wyeth milk
powder brand in China, did not respond to questions about its China
business.
A spokeswoman for Hong Kong-listed Want Want, which uses Fonterra
milk powder in some of its drinks, said it had a "diversified
strategy" to manage supply chain risk. She declined to comment on
individual suppliers.
U.S., EUROPE MAKING MOVES
Chinese firms, too, have been putting out feelers.
Over the past year, Inner Mongolia Yili Industrial Group Co Ltd
<600887.SS> has set up an alliance with Dairy Farmers of America Inc
<DRFMA.UL>, while China Mengniu Dairy Co Ltd <2319.HK> has announced
tie-ups with Danish dairy group Arla Foods <ARLAF.UL>.
Dairy Farmers of America is set to open a whole milk powder
processing plant in the United States in the first half next year,
with estimated annual output of 40,000 tonnes. It would be the first
in the United States specializing in whole milk powder, an important
step for targeting China, where whole milk powder consumption is
seven times that of skimmed powder, according to the U.S. Department
of Agriculture.
"The new plant is significant as it could establish the U.S. as a
viable supply option to New Zealand," said Shaskey. He estimated
around half the plant's output would go to China.
Dairy Farmers of America declined to comment.
Irish dairy firm Glanbia PLC <GL9.I> is developing a 150 million
euro ($206 million) milk powder plant in southeast Ireland to tap
the export boom to markets such as China once the European Union
scraps a 30-year-old limit on output in 2015. A Glanbia spokeswoman
said China had become the firm's Asia hub, but she declined to
comment on supply contracts.
Arla Foods has increased its range of offerings at global auctions
as the cooperative looks to gain access to China. "We have primarily
had our eyes on China as it's the fastest growing market for child
nutrition products," said Finn Hansen, head of international
operations.
Some Chinese buyers are also building their own facilities in New
Zealand, which could help them bypass Fonterra.
But analysts said breaking Fonterra's dominance would not be easy,
and it remained to be seen if Europe and the United States could
significantly raise their export capacity.
New Zealand exports more than 90 percent of its output and controls
a third of the global dairy trade. Most of those exports come from
Fonterra, which is owned by its 10,500 farmer suppliers.
"There may be a shift to other suppliers," said David Mahon,
managing director of Mahon China Investment Management. "But there's
not enough capacity in Europe or even the USA for a shift away from
Fonterra to be significant or long term."
($1 = 0.7271 euros)
(Additional reporting by Martinne Geller
in London, Dominique Patton in Paris, Teis Jensen in Copenhagen, Silke Koltrowitz in
Zurich, Conor Humphries in Dublin, Sarah Young
in Belview, Ireland and Shanghai newsroom; editing by Dean Yates and
Ian Geoghegan)
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