Melamine takes its toll on ingredient sales in China

19-Dec-2008 - Last updated on 19-Dec-2008 at 16:57 GMT

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 FoodNavigator.com: “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.