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China's Yili eyes another $200M investment

China's Yili eyes another $200M investment as NZ dairy operations pick up steam

By Rebecca Howard

Oct. 26 (BusinessDesk) - As China's Inner Mongolia Yili Industrial Group eyes up a possible expansion into Australia, its New Zealand operation is picking up steam with plans to build a state-of-the-art laboratory and to invest at least another $200 million.

Oceania Dairy - the South Canterbury-based dairy company owned by Yili - is in the process of commissioning the second stage of its development, which includes a canning and blending operation for infant formula and two UHT manufacturing lines, general manager Roger Usmar told BusinessDesk. The first stage involved 10-tonne an hour infant formula capable dryer. Total investment so far is around $400 million.

The third stage of development will likely include a second, larger dryer and a lactoferrin plant, although the dryer's size hasn't been determined, said Usmar. Meanwhile "we arguably have a stage two-B and we are working through the approval process," he said. Oceania has a small onsite laboratory for testing but expects to commence construction of a far larger laboratory to support the operation by mid-2018, he said.

The lab will let it carry out all in-process quality checks and the vast majority of the final product grading or testing and is partly in response to increased quality oversight from China, said Usmar. "Clearly, the standards from China are very high and in actual fact are exceptionally high and are getting higher. They are certainly not getting any easier, so it's that," he said. An onsite laboratory also gives the company total control of the value chain, including testing, "so that's an important component," he added.

Total investment including the lab and the third stage of development - will be "certainly be a minimum of $600 million and possibly north of $600 million," he said.

Oceania Dairy currently has 73 suppliers, all within a 50-kilometer radius of the facility. It is a "very tight collection base, which gives us some great efficiencies around our milk collection costs, which are exceptionally low," he said.

According to Usmar, there is a "healthy interest" from other farmers keen to supply Oceania. With another dryer the company will be looking to potentially double or even triple the milk intake and "we have a very healthy level of interest from other suppliers in other companies who have signalled that when we have a need they will be very keen to supply us," he said.

In terms of payment to suppliers, Usmar said Oceania offers a premium over and above what Fonterra Cooperative Group pays but he would not specify an amount. Fonterra is expecting to pay its farmers $6.75 per kilogram of milk solids in the current season.

Oceania reported a $6.8 million loss in calendar 2016, from a loss of $16.3 million in 2015 as revenues rose to $164 million from $141 million in the prior year, according to financial statements lodged with the Companies Office.

It employs 225-to-230 people, up from 95 two-and-a-half years ago. "We are seen as a bit of an asset on the ground," he said, adding that Yili has made a concerted effort to develop talent and ensure a positive relationship with stakeholders.

Usmar said he was not in a position to comment on Yili's interest in Australia's Murray Goulburn, which is holding its annual meeting on Friday. In September, Yili said it had submitted "a cautious non-binding strategic development proposal" to the unprofitable dairy cooperative. According to the Australian newspaper, other suitors include China Mengniu Dairy, Canada's Saputo, Parmalat, Bega, Fonterra and Arla Foods.

Yili acquired the fledgeling Oceania in 2012 after the previous owners failed to raise enough funds to create their own dairy factory, gaining access to 38 hectares of land at Glenavy with existing resource consents for the plant. Most of the output is shipped to Shanghai Stock Exchange-listed Yili's factories and supply chain in China, where it is the nation's biggest dairy company.



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