China’s melamine crisis has knock-on effects

Melamine takes its toll on ingredient sales in China

By Jess Halliday, 19-Dec-2008

Related topics:
Public Concerns

The impact of this year’s melamine dairy crisis has rumbled through the
food chain and although quality assurance measures can benefit
responsible firms, downturn in Chinese dairy has still led to lost of
ingredients sales.

Since the problem of milk contaminated with the industrial chemical melamine
came to light in September, ingredients have come under increased
scrutinised for their sourcing. A number of ingredients firms – and not
only those dealing in dairy – have issued messages of reassurance about their sourcing and standards.

However Danisco’s Q2 results, reported this week, are testament to the
wide-reaching effect such problems can have on companies that are not
even directly involved. Danisco executives have estimates the impact of the melamine issue on the company at around DKK 25m (c €3.36m at today’s exchange).

A spokesperson told “We are not directly
affected, but as Chinese consumption of dairy products has gone
dramatically down, demand for our product has gone down as well.”

He added that Danisco’s ingredients offering comes far down the food
chain, but there are not as many flavoured and combined dairy products
being produced. This means that enablers in particular have felt the
pinch, and cultures have also been affected.

Even though the melamine crisis has led to the Chinese authorities
taking a sterner look at food safety and initiating a programme to
address some of the problems plaguing the market, it looks like it will
take longer for consumer confidence to be re-built.

In its results statement Danisco said: “We would expect a period of up to one year before the Chinese ingredients market is stabilised.”

Despite the problematic Chinese dairy market, however, Danisco did
still report an increase in sales for both enablers and bioactives in
2Q, compared to the same period of last year. Global enabler revenues
were up 16.3 per cent to DKK 1429m (€191.9m), and bioactive revenues up
1.4 per cent to DKK 874m (€117.3m).

The Chinese dairy market

The dairy market in China has boomed in recent years as economic
prosperity has enabled more consumers to eat Western-style diets, which
typically incorporate more protein.

According to the China Dairy Statistical Yearbook produced by Lehman
Brothers in 2006, annual dairy consumption (milk, yoghurt, milk
beverages and dried milk) was around 22m tonnes in 2007 – up from 14m
in 2003.

However according to reports, 80 per cent of Chinese polled said they
have stopped trusting milk, and sales are thought to have dropped by
between 30 and 40 per cent.

Some commentators have predicted that the melamine problem will
actually enable an organized dairy industry to emerge in China, as
opposed to a handful of marketing companies, since there is demand for
quality assurance.

At the beginning of this month expectations began circulating that US
private equity firm Kohlberg Kravis Roberts could buy Mengniu Modern
Dairy, a major player that was caught up in the melamine contamination.

Such a move would be seen as a considerable vote of confidence in the sector.