There are three reasons for the price increase of raw milk powder. Firstly, the cost increase. Due to small profit margins, rising cost inevitably causes gross margin decline, which is the direct cause for the price rise.
Secondly, changes in demand. The outbreak of international financial crisis in 2008 led to reduced demand for milk in 2009. The International milk powder prices had been at a low level until last August. This is mainly reflected in New Zealand milk powder price decline. Affected by this, China raw milk powder prices were also low, yet with the impacts of economic downturn reducing, the price of raw milk powder began to rise from August 2009.
Thirdly, the link between the Chinese market and international markets increased. Since China joined WTO, China has become New Zealand’s largest milk powder export market. Effects of the international market on the Chinese domestic market became increasingly evident. The rising price in international markets will inevitably cause price rises in the domestic market.
New Zealand Fonterra’s whole milk powder (WMP) prices (FAS, FOB price), were in a slump from January to July 2009. The prices touched the bottom in February and July, with average price roughly $2,030/MT. Meanwhile, domestic WMP prices broadly remained in RMB17,000-22,000/MT.
Since last September, Fonterra WMP price has climbed higher and higher, reaching a peak in December. At the same time, due to inventory dumping, the supply of raw milk powder decreased in the Chinese market. Consequently, domestic raw milk powder prices rose, reaching RMB28,000-30,000/MT in December.
The price rise of final powder products in China isn’t directly caused by cost increase. In fact, when international milk powder prices went down, domestic prices of infant formula powder were on the way up. Manufacturers attribute the price rise to formula improvement, package or transportation costs increase etc.
Actually, the prices of final powder products in China are affected by many factors, but controlled by foreign-funded enterprises. This time, the price rise is largely driven by rising costs. Therefore, foreign brands collectively attribute price rise to cost increase, not mentioning other reasons.
However, the prices of China powder brands have some connection with the cost. Compared with foreign brands, most domestic brands are on sale in low-end markets, having small profit margins, therefore the increase of raw material powder price, packaging, transportation and other costs can easily drive final products’ price increases. In addition, price rises of foreign brands could drive a domestic brand price increase.
We believe that raw milk powder prices will stabilise in 2010, of which the stability of Fonterra WMP price is the most important reason. Meanwhile, under pressure of competition, final product prices will increase but along with sales. The overall price of final products will also stabilise in 2010, but due to rigid demand it would rise slightly.
Chen Lianfang is a senior analyst at BOABC
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