KEY POINTS:
Chinese police have arrested two brothers suspected of adding an industrial chemical to milk they sold to a company that produced infant formula that has killed two babies.
The news came just hours after Fonterra chief executive Andrew Ferrier said he was happy with the way the NZ dairy giant had acted over the crisis, which has affected more than 1200 babies.
"I can look myself in the mirror and say Fonterra acted absolutely responsibly in this one," he said.
Contaminated milk powder made by Chinese dairy company San Lu was publicly recalled last week.
Dairy co-operative Fonterra - the world's biggest dairy exporter - paid US$107 million for 43 per cent of San Lu in 2006 and has three directors on the seven-member board.
The two brothers, surnamed Geng, run a milk collection centre in Hebei province and are accused of adding melamine, a chemical used in plastics, to the milk to make it appear higher in protein, the official Xinhua News Agency said.
They sold about three tons of contaminated milk a day, the report said.
Chinese investigators say melamine may have been added to the milk to fool quality tests after water was added to fraudulently increase the milk's volume. Melamine is rich in nitrogen, and standard tests for protein in food ingredients measure nitrogen levels.
Mr Ferrier said San Lu had rigorous testing procedures "but it's impossible to totally exclude sabotage of a product".
He said he was frustrated with the handling of the situation by the Chinese authorities.
"This is a very big issue ... and we would have been much happier if this thing had been in the public domain sooner," he said.
The San Lu board was informed about the contamination, met officials and ordered a trade recall of infant formula on August 2, Mr Ferrier said.
However, it would have been irresponsible for Fonterra to have gone public that day.
"What we had to do was ensure San Lu worked with Chinese authorities within normal guidelines of Chinese practices to begin the recall and that's what happened," he said.
San Lu has been reported to have received complaints in March and to have recalled products but not reported the problem to officials.
"We're not aware of anything until August 2 when the San Lu board was informed for the first time," Mr Ferrier said.
The vast majority of San Lu products have now been recalled. Taiwan is the only export destination.
Prime Minister Helen Clark yesterday said a full recall had earlier been blocked by Chinese local officials.
She said she found out about the milk powder issue on September 5 and the New Zealand Government blew the whistle in Beijing.
"I'm confident Fonterra wanted the product recalled from the beginning but could not get the local authorities in China to do that," she said.
"Eventually, Fonterra quite properly came to the New Zealand Government. When it came to me and other ministers, we said to officials, 'Do not hold back a moment later, you must go in at the highest level you can in Beijing'."
Helen Clark did not believe the tragedy would damage the New Zealand national brand.
"If there was a lesson from this for Fonterra and any other Kiwi company looking to have joint ventures in anything which can have a product impacting on consumer safety, they have to be assured that the processes that will be followed in that joint venture are ones that we would be able to defend."
