Saudi milk processors merge

After a year of deliberating the five major players in the fragmented Saudi Arabia dairy industry have decided to opt for the safety of a merger, reports the BBC this week.

The Azizia, Najdia, Mazra, Hana and Riyadh dairies, all threatened by cut-throat price competition due to excessive supply, have begun merger talks with the aim of forming an 80 million litre-per-day company.

The combined firm will have a market share of 11 per cent, big enough to compete with the market leaders in the country. But with milk prices continuing to fall and demand growth sluggish, the future for the sector as a whole looks bleak.

It is hoped that the five-way merger could help combat the crippling fragmentation within the Saudi dairy industry, that is currently preventing any of the players in the business make substantial profits.

There are currently 26 major dairy producers in the Kingdom, and only two - Alsafi, owned by France's Danone, and Almaira - have significant market share. The pair control more than 60 per cent of the market, with another 25 per cent divided between the Nadek and Nada producers.

Life for the rest has been tough, with milk prices dropping by more than one-quarter over the past 12 months in the fight for market share.

Overall, milk demand in Saudi Arabia is growing by only 4 per cent annually - way below levels seen elsewhere across the Middle East. Late last year, it was predicted that at least half-a-dozen small firms would fold, but despite repeated talk of mergers, no real action has been taken until now.

In the longer term, however, the industry's prospects do not look rosy. Saudi Arabia's dairy industry operates to the highest standards, and is on a breathtaking scale: Alsafi's farm, with some 30,000 cows, is the biggest in the world. But its size largely reflects heavy subsidies from a government desperate to chip away at economic reliance on oil.

Overall, more than $1 billion (€1bn) was invested in developing dairies, and billions more were ploughed into other livestock and arable farming in former desert areas. This has left dairy producers with significant overcapacity, despite periodic attempts to carve out an export market around the Middle East.

The current price war is the second to hit the dairy sector. The first lasted for six months until a ceasefire was brokered in May 2000.