Investors should avoid the Chinese dairy sector, as it will face higher costs in the wake of the melamine contamination scandal, according to investment bank JPMorgan Chase.
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Four babies have died and thousands of others are ill after drinking milk formula contaminated with the industrial chemical melamine. Melamine has now been found in liquid milk produced by the country’s top three dairies, Mengniu, Yili and Bright.
“The melamine issue seems to be a sector-wide problem and we continue to believe that raw milk quality in general is at stake,” wrote Hong-Kong based analyst Selina Sia.
A lack of commercial cattle farming, unfavourable returns for milk farmers and the rapid expansion of the dairy industry have all contributed to a shortage of raw milk, she said.
Sia said that implementing tests for chemicals in raw milk would not improve the quality and quantity of raw milk, adding that investment in commercial farming is “unavoidable”.
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By GlobalData“We expect both raw milk prices and operating costs to increase for dairy companies in the short run,” wrote Sia. “We advise investors to avoid the dairy sector.”
Both Mengniu and Yili issued apologies to the public yesterday (18 September). Mengniu also yesterday posted a 20% rise in half-year profits on the back of a 37% jump in sales but growth during the rest of the year is likely to be hit by badly dented consumer confidence.
