“We think the downturn is temporary, and that China’s dairy market will continue to grow.
“However, a shrinking population and moderating economic gains will translate to a likely 2%-3% compound annual growth rate in volume sales over the next two decades - half the rate of the prior two decades.”
S&P said the slowdown would have “mildly negative” rating implications for Fonterra, Bright Food, China Modern Dairy, Yili, and China Mengniu.
Slower growth in China would cap volume growth for Fonterra, but S&P said a shift to high-value cheese may help Fonterra’s margins.
For Health and Happiness, the implications were negative due to increasing margin pressure in the infant formula segment.
Chang said a shrinking population was a clear negative for the industry. Lower birth rates and an ageing population would also depress Chinese dairy consumption over the next five years.
However, she said there was a “wrinkle” in that assumption: An ageing population may be positive to volume growth 10 to 15 years from now.
“Even though total daily consumption of adult formula will always be lower on a per capita basis than for infants, the growing number of elderly will likely offset declining baby consumption, in our view.
“Adult powdered milk won’t save the day in value terms.
“People are simply much more willing to pay higher prices for infant formula than that formulated for adult use,” Chang said.
Infant-formula volume sales in 2023 were 60% larger than adult powdered milk consumption.
There was a higher likelihood for firms to experiment with health supplements, soft drinks and overseas expansion.
S&P noted that Mengniu and Yili were pushing into growth markets such as Southeast Asia.
“Even as they face lower requirements for big capital expenditure domestically, they will need to spend more on production offshore.
“The move into any new market is risky, and will involve trial and error and inevitable setbacks.
“This will add volatility to the leverage, cash flow, and credit quality for Mengniu and Yili.”
S&P said the basics of the China dairy growth story remained intact - dairy penetration in China is still low compared with other countries.
According to Euromonitor, China’s dairy consumption per capita was about 18kg per year in 2023, which is two-thirds of the world average (25kg) and about a third of the consumption in the United States.
S&P expects annual per capita dairy consumption in mainland China will eventually plateau at 28kg to 30kg.
With similar cultural preferences and diets, dairy consumption in mainland China on a per capita basis should get closer to that of Hong Kong and Taiwan, at roughly 30kg per person each year, it said.
However, dairy consumption in China was unlikely to reach a comparable level with that of the West.
China’s dairy sector has long served as a barometer of China’s growing prosperity, S&P said.
“As per capita spending power has steadily climbed, so have consumers’ taste for dairy goods, which make food rich and flavourful.
“That trend is not changing but it is moderating.”
S&P noted that Chinese annual GDP gains were tapering off as the economy matures.
Powerful demographic forces were depressing demand for high-margin infant milk formula and a persistent deflationary dynamic was hitting prices and profits.
That meant firms would have to work harder for their gains.
“This will likely involve experimentation and innovation, and likely risk,” the agency said.
Jamie Gray is an Auckland-based journalist covering the financial markets and the primary sector. He joined the Herald in 2011.
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