Fonterra's sale of San Lu stake hinges on supply chain control

Monday 20th October 2008

Fonterra Cooperative Group, the world's biggest exporter of dairy products, says the future of the company's stake in San Lu will hinge on whether it can gain enough control over the supply chain in China.

The cooperative is considering selling its 43% stake in San Lu after writing down the value of the investment by almost 70%, or NZ$139 million because of the damage done to the brand by the tainted milk scandal, which killed four Chinese babies.

"Discussions are continuing around a number of facets of San Lu's future," chief executive Andrew Ferrier said in an emailed statement. "These include the possibility of San Lu being acquired by a third party."

China is still investigating how melamine ended up being added to raw milk sold to San Lu. The same chemical was to blame for tainted pet food sold in the US last year and can boost the protein reading of milk which has been diluted to boost returns.

"Any solution involving Fonterra's long-term investment in San Lu or other aspects of the Chinese dairy industry will hinge on us having sufficient influence over key aspects of the dairy supply chain," Ferrier said.

The company last month reiterated that it is committed to the Chinese market.

By Jonathan Underhill

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