Safety scandals give foreign dairies a boost in China

Mon Jun 18, 2012 1:46am EDT
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By Lucy Hornby and Jane Lanhee Lee

BEIJING/SHANGHAI (Reuters) - 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 (600887.SS: Quote) 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 13 percent over the last two days to trade at 21 yuan a share.

The latest foreign bet comes from Danish-Swedish dairy group Arla ARLAF.UL, which said on Friday it would buy what amounts to a 6 percent stake in Yili's main competitor, China Mengniu Dairy Co (2319.HK: Quote), from private equity fund Hopu for 1.7 billion Danish crowns ($289 million). The deal lifted Mengniu shares by 7 percent on Monday.

"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.   Continued...

Products of China Mengniu Dairy, one of China's leading dairy products company, are displayed at a news conference announcing the company's interim results in Hong Kong September 19, 2008. REUTERS/Bobby Yip