26 Mar 2012

Cooling Chinese economy could affect Fonterra result

7:42 am on 26 March 2012

Waning international commodity prices and a cooling Chinese economy will provide the backdrop for Fonterra's half-year earnings result when it is revealed on Thursday.

The dairy cooperative has already lowered its forecast payout to between $6.75 and $6.85 a kilogram of milk solids for the current season, blaming the high New Zealand dollar and an increase in milk supply globally.

Analysts say further payout reductions can't be ruled out, mainly because demand for commodities in the influential Chinese economy has slowed.

Fonterra has made no secret that its growth is tied to developing nations such as China.

Chris Green, an economist and strategist at First NZ Capital, says the dairy giant's comments on trading over the rest of the year will be keenly anticipated.

He says the dairy sector accounts for 5% to 7% of gross domestic product (GDP), while the milk, butter and cheese component accounts for about 25% of exports.

Mr Green says looking ahead, if commodity prices continue to drop, it will have a negative impact on broader GDP.

He believes the downward trend is primarily linked to softening growth expectations in China. There are signs of overheating in the Chinese housing market which authorities are trying to dampen.

Chris Green says there are also structural changes as the country tries to reorientate the growth profile away from heavy investment towards a more consumption based economy, which necessitates a slowing of activity during the transition.