China’s restructuring within its dairy industry has been driven by a series of food safety incidents; the most serious being the baby formula melamine contamination scandal which caused the death of several babies. Foreign companies now account for more than 60% of the market compared to 30% of the market before 2008. The Chinese government’s aim is to consolidate the industry from 127 milk powder manufacturers to 50 and to support the development of 10 large-scale dairy companies to cover 70% of the market in five years. Initially consolidation did not quickly occur after 2008 because companies were uncertain of the outlook for future demand. However this changed in 2012 when industry consolidation began to gain momentum. According to statistics from Capital IQ there were 44 IPO/M&A deals in the Chinese dairy industry in 2012 compares with 39 deals in the year to end-August 2013. Further consolidation is expected to be not only driven by government policy and the desire to enhance food safety and boost consumption of domestic products, but it will also be driven by the severe raw milk shortage in China. In 2013 the milk shortage will exceed 4 million tons compared to 1.7 million tons in 2010. And because consumption is expected to grow at a compounded annual growth rate (CAGR) of 8.2% for 2012-2017, consumption will continue to outpace production increases which are estimated to grow at a CAGR of 1.2% for 2012 -2017.
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