January 25, 2011

China toughens dairy regulations

China has ordered dairy firms to apply for new production licenses this year in a move designed to improve product quality and safety in an industry plagued by scandals.

Firms, including baby formula makers, that fail to obtain new permits will be forced to close, said Zhi Shuping, the head of the General Administration of Quality Supervision, Inspection and Quarantine.

Consumer confidence in the dairy industry plummeted in 2008 after it was revealed that the industrial chemical melamine was being added to watered-down milk to make its protein content seem higher and boost profits. Infant formula made from tainted milk sickened hundreds of thousands.

The Chinese dairy industry is suffering as a result of a series of product quality scandals that have given a bigger share of the market to imported milk powder products, an official from the Ministry of Agriculture said.

In terms of nutritional value and quality, most local brands are on the same level as foreign brands, said Wang Dingmian, former executive director of the China Dairy Industry Association. Foreign brands raised their prices three times in 2010, giving imported milk powder products an average profit of 80%.

The government's new move will not only speed up the dairy industry reshuffle but will also lead to general rise in dairy prices, said chairman of the China Dairy Industry Association Song Kungang.

Based on legitimate production license, some firms have to be improved and gain a large investment. In addition, all products manufactured need to pass inspection before hitting the market, which will increase the costs from inspection, Song explained.

With raw material prices also rising sharply of late, these cost increases will be passed on to consumers in the end, he added.

The domestic dairy industry is experiencing intense competition. Some companies worry price adjustment will lead to loss of market share, and many companies are putting efforts into developing new products for greater profits, according to industry sources.