On Monday (3 June) seven Chinese Government ministries released a joint action plan to strengthen the domestic infant formula market. Its goal was to increase domestic supplies to more than 60 per cent of the market. China Daily reported domestic milk formula accounted for 43.7 per cent of the market in 2018 with a 21.1 per cent growth rate.
The notice also encourages companies to acquire and restructure the infant and toddler formula milk industries to eliminate outdated production capacities and further consolidate the industry.
It is expected to support eligible companies to issue shares and bonds to grow larger, and other taxation benefits will be offered to companies that establish dairy manufacturing facilities overseas.
It also outlined the need to tighten registration of overseas formula milk producers and to strictly carry out the implementation of recording and registration of the sales system for imported dealers.
Media reports said in China the wholesale infant formula market was worth $15 billion in 2018, with $8.7 billion from imported products.
Demand for overseas formula was driven by a milk scandal in 2008 when melamine-laced formula killed six children and made 300,000 sick. In December last year the ABC reported Chinese personal shoppers – known as daigou – buy formula, vitamins, beauty products and other goods in Australia to sell on Chinese ecommerce sites. There are around 400,000 diagou in Australia, it said.
Impact on Australian infant formula manufacturers
A2 Milk Company, Bellamy's and Bubs Australia are the biggest formula exporters to China. A2 shares fell more than seven per cent on Tuesday (4 June) to $13.25. Almost $1 billion has been wiped from its value since the announcement.
Bellamy's stock fell eight per cent to $7.85.
Bubs Australia dropped eight per cent on Tuesday after falling seven per cent on Monday.
Bubs CEO and founder Kristy Carr told The Australian Financial Review the announcement would work in Bubs' favour as it entered a relationship with Chinese formula group Beingmate in March. Such a joint venture was the type of relationship Chinese authorities were encouraging, she said.
In March, Bubs Australia announced plans to buy infant formula producer Australia Deloraine Dairy - one of only 15 licensed canning facilities in Australia that meets regulatory import conditions into China (F&DB 01/04/2019).
In May, Bubs entered a supply agreement with Fonterra to venture into the cow's milk infant formula space while remaining committed to its core goat's milk product range.
The a2 Milk Company’s net profit rose 55.1 per cent to NZ$152.7 million in the six months to 31 December 2018, with Chinese revenue also rising 50 percent to NZ$171.7 million.
Its Group infant formula revenue rose 45 per cent on 2017 to $NZ495.5 million, with China label revenue up 83 per cent (F&DB 11/03/2019).