China moves further towards milk powder sector consolidation: paper

Fri Aug 16, 2013 2:52am EDT
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SHANGHAI (Reuters) - The Chinese government is set to issue a formal proposal to prompt consolidation among domestic infant formula firms, a state-run newspaper said on Friday, naming Inner Mongolia Yili Industrial Group (600887.SS: Quote) as one of the likely beneficiaries.

The proposal is part of the government's drive to slash the number of domestic infant formula manufacturers over the next five years to 50 from about 200 now, the China Securities Journal said, citing an unnamed source.

By 2018, China expects the top 10 local companies to account for 80 percent of the domestic market, with the largest three-to-five firms targeting annual sales of over five billion yuan ($818.00 million), the report said.

The newspaper said Feihe International ADY.BE and Wondersun Dairy were also likely to gain from the consolidation plan, but gave no further details.

Analysts said the consolidation drive is part of a broader plan to boost consumption of local product and allay fears about food safety following a 2008 scandal, when formula tainted with melamine killed at least six infants and made thousands ill.

Last week, the country's price regulator also handed down record fines to foreign milk powder makers, including Mead Johnson, (MJN.N: Quote), Danone (DANO.PA: Quote) and New Zealand dairy giant Fonterra (FSF.NZ: Quote), for anti-trust behavior.

"The government sees a lot of room for consolidation and the real motive here is to improve the overall standards of infant milk formula products," said Sandy Chen, a Shanghai-based senior analyst for food and agribusiness at Rabobank.

Consumers in China are highly sensitive to food safety after persistent problems such as chemical-laced pork.

China's infant formula market is worth around $12.4 billion in 2012, and is set to double in size by 2017, according to data from Euromonitor.   Continued...

An Abbott Laboratories sales staff carries a carton of powder milk tins out of a shop during a production recall outside Hanoi August 6, 2013. REUTERS/Kham