China halts Fonterra milk-powder imports in blow to New Zealand

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New Zealand said China suspended imports of milk powders from Fonterra Cooperative Group Ltd., the world's largest dairy exporter, after the company warned of a contaminated ingredient used in products from baby formula to sports drinks.

"We understand that China has suspended imports of all whey protein and milk-based powder sourced from Fonterra, whether exported from New Zealand or Australia," the Ministry for Primary Industries said in an e-mailed statement in Wellington today. Fonterra said on Aug. 3 three batches of a whey protein made at a New Zealand plant last year may contain bacteria that can cause a rare illness called botulism.

The restrictions are a blow for New Zealand, which relies on exports to China, its biggest trading partner, for growth. Dairy products make up about a quarter of the South Pacific nation's total overseas sales, which in turn account for about a third of economic output. Fonterra collects 89 percent of the milk produced in New Zealand.

"This could be quite a big deal for New Zealand's prospects, certainly in the near term," said Paul Bloxham, chief Australia and New Zealand economist at HSBC Holdings Plc in Sydney. "This is likely to have an influence in the short run on the New Zealand dollar and on markets in New Zealand on Monday."

Coca-Cola Co. (KO) in China said it has quarantined some whey protein it received from the New Zealand company. Chinese regulators said companies including Hangzhou Wahaha Group were among importers of the potentially tainted ingredient. Russia has also suspended imports of Fonterra products, the country's consumer rights watchdog said on its website.

Fonterra Director of Communications Kerry Underhill said the company hasn't had confirmation of reports that Russia has banned all Fonterra products.

Different countries

The whey protein batches were mixed with other ingredients to form products sold in markets including China, Australia, Thailand, Malaysia, Vietnam and Saudi Arabia, the New Zealand ministry said.

The U.S. Centers for Disease Control and Prevention describes botulism as a serious paralytic illness.

Four companies including units of Wahaha and Danone's Dumex brand imported possibly tainted products from Fonterra, China's quality supervision regulator said in a statement today. The products have been recalled, the regulator said. Danone and Wahaha couldn't be reached outside of regular office hours.

Coca Cola

Coca-Cola Greater China said in a statement that 25 kilograms of Fonterra's whey protein were used in the production of isolated batches of the company's Minute Maid Pulpy Milky product. The company said it will recall products from these batches in China.

External and internal experts confirmed its products are safe due to an ultra-high temperature manufacturing process and low acidity, which sanitizes the final product, Coca Cola said.

A further 4,775 kilograms of the whey protein have been quarantined, it said.

Trade Minister Tim Groser said New Zealand should expect "a wide ban."

"The entire world knows about this," he told reporters. "Different countries are taking different positions, and it's absolutely appropriate that they should."

In an earlier television interview, Grosner said China had stopped all imports of New Zealand milk powders.

In New Zealand, five batches of Nutricia Karicare follow-on formula products for children from 6 months old were identified as potentially containing contaminated protein. Nutricia recalled two baby formula products in New Zealand.

"˜Reputational risk'

"It's not good," said Stephen Toplis, head of research at Bank of New Zealand in Wellington. "It's reputational risk more than anything, and that will be determined by what happens over the coming weeks in terms of how the company responds."

Fonterra said Chief Executive Officer Theo Spierings, who is visiting China for scheduled meetings, will speak with customers there and the company will hold a press conference in Beijing Aug. 5. There have been no reports of any illness linked to consumption of the affected products, Fonterra said.

"Fonterra would be the first to say that they have been on the back foot on this issue," New Zealand Minister for Economic Development Steven Joyce told reporters. "They would also tell you that some of the information that they initially relied on has changed."

China impact

"Fonterra is doing everything possible to protect human health and our focus is on public safety," Gary Romano, managing director of New Zealand Milk Products at Fonterra, said at a press conference in Auckland. Any financial impact would be something to assess later, he said.

Fonterra, which said none of its own branded consumer products are affected by the quality issue, drew about 14 percent of its revenue from China in the six months ended Jan. 31, according to data compiled by Bloomberg.

Fonterra in January had to assure China that traces of an agricultural chemical found in some milk posed no health risks. In 2008, locally made melamine-contaminated milk powder caused an industry-wide scandal in China, prompting the collapse of Fonterra's partner Sanlu Group.

China is stepping up scrutiny of local and international food companies. This year it disclosed a probe into pricing of baby formula, prompting companies from Danone to Nestle SA (NESN) to cut prices. Fonterra in July said it would cut prices in China for Anmum supplements for pregnant women.

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