Maintain, build on NZ image in China

And NZ must respond more to the structural change seen in Chinese consumers trading up to premium, higher added-value products, says Sandy Chen, Rabobank’s senior dairy and beverages analyst for Asia.

“Strategies need also to be increasingly formulated around product innovation, value addition and category expansion, for example, to supply the Chinese market,” he told Dairy News during a visit to NZ last week.

“It is more about developing an approach to grow more value rather than just through volume.

“We are aware that NZ has been a pretty successful supplier of milk commodities into China, but going forward more value added consumer dairy products would be good.

“Also, while China will continue to grow and remain very important to the NZ dairy industry as an export market, we should be mindful that China will be slow in terms of growth.”

Some other markets, particularly the South East Asia region, will present higher market growth than China because of their young demographic profile, a solid economic growth outlook and an apparently low per capita consumption of dairy, he says.

With these South East Asia countries, particularly Indonesia and Vietnam, per capita consumption is half of where China is now, so dairy self-sufficiency is only 20%.

“They rely a lot on imports to meet domestic demand and that is growing. So while maintaining a presence in China, NZ should not under-invest in those faster growing markets,” he advises.

Chen says China is back in the market for dairy imports, but this is tempered by sluggish consumer demand growth, a trend since 2013. They expect low single-digit consumer growth; last year it was about 2%.

Nevertheless he expects increased demand for dairy imports in the second half of the year.

Last year already there was a 17% year-on-year increase in liquid milk equivalent imports. China was away from the market from second-half 2014 to the end of 2015. But the appetite started to return in 2016.

“The destocking has progressed pretty well since the second half of 2015, and last year China had a 4% decline in production -- a loss of 1.5 billion litres of milk. That helped further destocking.

“We estimate the opening inventory in 2017 was actually at below normal level. What we are seeing now is consumption remaining lacklustre, with low single digit growth in the first half.

“But domestic production continues to struggle. We don’t have a lot of transparency on the production data for the first half but the anecdotal evidence from leading dairy provinces suggests at least these three dairy provinces will have a drag of at least three percentage points plus in dairy production growth.

“So this potentially is a large number and could hinder production growth in China. At the same time in the first few months – January to May – import performance in growth year-on-year was quite disappointing.

“This means the supply chain is further stretched and for China to balance the market it will need to import more from the global market, starting from the second half.”

He says the appetite will be stronger in the second half, particularly as China goes through the summer.

“There are patches of heat in the northern part of China that may have already impacted production. As we move into the late third quarter, and the fourth quarter, we will start to see seasonal strength of demand coming back more strongly due to a few national holidays in the run-up to the new year.

“We expect in the second half the domestic raw milk price will improve and we will likely see imports coming in more strongly. The growth year-on-year will be much higher than in the first half.”