Little impact seen on Synlait, A2, Fonterra fund from tighter Chinese infant formula rules

New Zealand's listed dairy companies, Synlait Milk, a2 Milk Co and Fonterra Shareholders' Fund, probably won't face much disruption from tighter rules on infant formula in China, the nation's biggest market for milk products, investors say.

A2, whose Platinum infant formula is manufactured at Synlait's Canterbury plant, led the three dairy companies lower on the NZX today, after saying it is monitoring and responding to China's new requirements, which include demonstrating a close association between brand owner and manufacturer, and a new form of registration from May 1.

China telegraphed its new requirements to the government last week by releasing an audit of a sample of New Zealand manufacturers conducted in March. That left officials and companies scrambling to interpret the changes in time for the registration deadline this week. The government says manufacturers who control 90 percent of the nation's infant formula exports are working through the registration process but the remaining 10 percent face a tougher job to comply.

A2 Milk, which sells infant formula in China, Australia and New Zealand, fell 9.5 percent to 76 cents, the lowest in more than four months. Fonterra units, which give investors access to Fonterra's dividend stream, slipped 0.7 percent to $6.15. Synlait, which counts China's Bright Dairy Food as a cornerstone shareholder, fell 0.8 percent to $3.61.

"The issues for those companies is more can they grow their businesses and at what prices for their product as opposed to this regulation," said Matthew Goodson, who helps manages $650 million of equities and property holdings for Salt Funds Management. "There is a very small chance it could be a major negative but I don't think that's really seen by the market as likely."

Last year, infant formula made up about 4 percent, or $200 million, to the nation's $5 billion dairy exports to China, whose government is trying to bolster food safety and restore confidence in baby foods made of milk powder after melamine-tainted formula caused the deaths of six children and sickened 300,000 others in 2008.

The scandal sparked a surge in demand for imported product in the world's most-populous country, where demand for dairy products is keeping pace with an emerging middle class. China already tightened rules for its own manufacturers last year.

New Zealand Primary Industries Minister Nathan Guy and Food Safety Minister Nikki Kaye said last week that tighter rules for imported infant formula would have "a very significant impact" on brand owners unable to demonstrate a close association with a manufacturer.

"The people it will have an effect on are those that don't really have any food production business, they just buy a whole load of infant milk formula that's been processed by somebody and then they whack a pretty label on it and sell it," Goodson said. "My understanding of these regulations is they're aimed at getting proper links in place between the manufacturer of a product and those selling it so it's a proper chain there to ensure quality control."

New Zealand's biggest dairy producer and exporter Fonterra Cooperative Group spooked dairy markets last year with a precautionary recall of whey protein concentrate thought to be contaminated. Later tests proved the bacteria found were harmless.

In January, Synlait said it expected sales of baby formula to fall below its 10,000 metric tonne target this year because stricter Chinese regulations had caused "considerable disruption" in that market. The dairy processor said it will spend $21 million expanding its laboratory and administrative facilities, in part to increase its testing capabilities.

(BusinessDesk)