Contamination concerns test consumer trust in Chinese dairy brands: S&P

Analysts warn contamination could pressure Chinese dairy credit profiles.

Chinese dairy manufacturers face potential market share losses, higher operational costs, and reputational damage following reports of a contaminated ingredient supplied by Wuhan-based Cabio Biotech (Wuhan) Co. Ltd., according to S&P Global Ratings.

The arachidonic acid (ARA) oil contains cereulide, a toxin that causes vomiting and food poisoning.

S&P expects such an outcome would redirect consumer demand towards international brands, as confidence in domestic products remains fragile following the 2008 melamine scandal.

Whilst no Chinese dairy producers have officially acknowledged tainted goods to date, major domestic players—including Inner Mongolia Yili Industrial Group Co. Ltd. and China Feihe Ltd.—source ARA ingredients from the affected supplier.

“The recent contamination is not nearly as serious, and no firm intentionally tainted its product. However, the latest developments may serve as a reminder that companies cannot take food safety for granted,” said Manqi Xie, a credit analyst at S&P Global Ratings.

Any discovery of contaminated formula among domestic brands could trigger widespread recalls and erode recent market share gains, S&P warned.

Milk formula accounts for a significant share of total revenue for Yili and China Feihe, S&P said. This meant any adverse findings are likely to weigh heavily on their earnings before interest, taxes, depreciation, and amortisation.

Firms also face rising costs linked to marketing, compliance, and intangible assets, the report added.