New Zealand's Fonterra agreed to buy a share in the Chinese dairy in December last year, paying €91.4 million in one of the largest investments ever made by a foreign dairy firm in China.
Go-ahead for the deal came yesterday as Chinese prime minister Wen Jiabao arrived in New Zealand to discuss trade issues.
"Developing a closer working relationship with San Lu is the logical next step for Fonterra's business in China," said Fonterra chief executive Andrew Ferrier in a statement.
"It complements our existing importing and consumer businesses there by partnering us with a successful local company that has access to local fresh milk supplies."
San Lu, which is based in Hebei province, is China's biggest milk-powder producer and one of the 'big six' Chinese dairies that control over half of China's fresh milk market.
While San Lu is already a long-time customer of Fonterra's, the New Zealand group is keen to gain a greater foothold in China's rapidly growing dairy sector.
Demand for dairy products is surging in China with rising incomes and it now has the fastest growing milk production in the world. But consumers still appear to favour local brands, boosting sales at leading firms Jili, Mengnui and Bright Dairy.
"New Zealand has been a successful exporter of dairy ingredients to China for decades, but as local production increases to meet the rapidly growing local demand, becoming part of the local industry will give Fonterra further opportunities to employ our expertise in all areas of the business from milk collection to consumer goods," said Ferrier.
He added that a free-trade deal currently under negotiation between New Zealand and China would bring further benefits to the dairy industries in both countries.
Almost €209 million of dairy was imported to China from New Zealand (the leading exporter to China) in 2004, more than double the value of imports in 2002, according to a report by 3A Business Consulting.Overall the country imported around 375m tonnes of dairy in 2004, compared to a little more than 200m tonnes in 2001. It also exported around 100m tonnes, largely made up of commodities.