Sanlu declared bankrupt by Chinese court, Fonterra says

Wednesday 24th December 2008

Sanlu Group Co, the Chinese dairy company shut down amid a scandal over milk products tainted with melamine, was declared bankrupt by a provincial court, according to Fonterra Cooperative Group.

The New Zealand dairy exporter owns 43% of Sanlu though the value was written off in Fonterra's accounts. The company has said it remains committed to the Chinese market.

Sanlu is to be managed by a court-appointed receiver after the ruling by a court in Shijiazhuan province. The move puts a six-month time frame on the sale of assets and repayment of creditors.

Earlier this month, Fonterra cut its share price by about 20%, citing "unprecedented" turmoil in equity markets and a "difficult" global economic outlook. The reduction also reflected the write-off of Sanlu.

Fonterra last month cut its forecast payment to farmers citing Sanlu and the 24% slide in global prices.

Separately today, the Commerce Commission cleared Fonterra of breaching competition law through the use of 'tactical pricing.' Under the regime, Fonterra paid some farmers a premium for their milk to prevent them defecting to rival dairy companies in an abuse of market power.

Fonterra argued that its prices just met the market, which was partly set by its competitors.

"While it is acknowledged that Fonterra is likely to have a substantial degree of market power in the raw milk market, the prices Fonterra offered to the targeted suppliers were no higher than those of its competitors and were, in some cases, lower," said Deborah Battell, the commission's director of competition, in a statement.

By Jonathan Underhill

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