China’s biggest dairy company is set to invest $214 million in a new infant milk powder plant in New Zealand driving more competition into Fonterra’s back yard.

Yili said it was attracted by NZ’s “relatively cheap” raw milk prices, as well as, the free trade agreement between China and New Zealand, under which dairy import tariffs reduce to zero by 2020.

The Inner Mongolian firm’s agreement to buy NZ Oceania Dairy – whose prime remaining asset is land resource consents for a dairy processing facility in South Canterbury – has to be approved by the Overseas Investment Office ((OIO) and Chinese regulatory authorities.

This will be the third major Chinese investment in the NZ dairy industry following Bright Dairy’s investment in Synlait, and, Shanghai Pengxin’s acquisition of the Crafar farms. It is understood that the Cabinet Ministers were well aware of? Yili’s intentions with Trade Minister Tim Groser having previously met the company. The investment in processing capacity – rather than farms – will be seen as a plus by the Government which has spent considerable political capital dealing with the Crafar farm furore this year.

Oceania has been in relative hibernation since it failed to get a $74.5 million capital raising away in the wake of the Global Financial Crisis. Synlait subsequently bought Oceania’s supply contracts. Oceania’s two directors are former National Party leader and Reserve Bank Governor Don Brash and CEO Paul Park, who are? also among the eight shareholders (see below).

The Inner Mongolia Yili? Industrial Group (known simply as ‘Yili’) is headquartered in Hothot alongside major rival Mengniu and is listed on the Shanghai stock exchange. It was an official sponsor of the 2008 Beijing Olympics. This is its first major offshore acquisition.

In a stock exchange notice last night, the company said it would? invest 1.1 billion yuan ($214 million) in a milk powder plant in New Zealand to enhance its competitiveness. The new plant will take 19 months to build; go into production by June 2014 and reach full production in the 2016-17 milking seasons with an annual output of 47,000 tonnes of infant formula.

The acquistion vehicle is Yili’s overseas wholly-owned subsidiary Yili International Development and Hong Kong Jingang Trade Holding which will purchase 100 per cent of Oceania Dairy. The target firm has land use consent for the construction of a whole milk processing plant, environmental consents and purchasing rights on a 38 hectares site.

Yili said the investment will boost its profitability and raise its brand influence – it will not affect its other businesses.

Chinese reports added the group’s milk powder division forecasts an increase of between 10-15 per cent in annual production and sales of Yili’s infant formula products. Yili expects China’s domestic supply of raw will be tight over the next five years while NZ’s ram milk volume has certain advantages. “In order to meet the needs of the rapidly growing market and to ease the tight supply situation in China, the New Zealand project is a necessity.”

The company expects the project’s internal rate of return will be 9.77 per cent and annual sales revenue will be RMB 1307 billion ($248.73 million) giving an average annual profit of of RMB 113 million ($21.59 million).

China’s imports of milk powder have been growing steadily in recent years after numerous food quality scandals made the headlines.