• Treasury Wine Estates' Penfolds range is set to be hit hard by China's sanctions on Australian imports.
    Treasury Wine Estates' Penfolds range is set to be hit hard by China's sanctions on Australian imports.

Provisional tariffs imposed by China on Australian wine imports will all but collapse the Chinese market for Australian wine, with charges from 107.1 to 212 per cent imposed on wine in containers of two litres or less.

In an indication of the current state of relations between the Australian and Chinese government, the news was delivered through the Chinese Ministry of Commerce (MOC) website, not diplomatic channels. This year has been fraught for Australian exporters, with China implementing sanctions on Australian seafood, sugar, coal, copper, timber and barley.

MOC announced its investigation into wine dumping in August. Its ruling on Friday (27 November) said Australian wine had been dumped in China, causing “substantial” damage to local growers. The ministry said it was a preliminary ruling and winemakers had 10 days to challenge.

The temporary measures apply to wine imports in containers of two litres or less. Importers will have to pay deposits to customs authorities, which will vary from company to company under a formula that will be different for each company.

Under Chinese anti-dumping regulations, the provisional anti-dumping measure cannot exceed four months (28 March 2021), but under special circumstances it may be extended to nine months (28 August 2021). The timing is dependent on China deciding if the measures should be maintained, adjusted, or removed.

Federal Trade Minister Simon Birmingham said the decision was “grossly, grossly unfair, unwarranted, unjustified”.

Federal trade minister Simon Birmingham
Federal trade minister Simon Birmingham will use every channel to challenge China's wine sanctions.

Birmingham did not rule out recourse through the World Trade Organisation (WTO) and said the wine sanctions, along with others, were “completely incompatible with the commitments that China has given through the China-Australia Free Trade Agreement and through the World Trade Organisation. It’s incompatible with a rules-based trading system.”

In a first from the government, Birmingham said the action gave rise to the perception China’s actions were in response to “some other factors”.

“It is entirely understandable why people would draw the conclusion and why perceptions will exist, but as a result of the accumulation of trade sanctions levied by China against Australia, this is a deliberate strategy. And that the approach in that regard is completely inconsistent with the type of undertakings that China has made. That is of deep concern.

“The motivations really are ones for China. But I can understand well and truly why people would draw the conclusions and how the perception has been created that this is a deliberate strategy, piling on pressure in a number of different sectors, it would seem. And that’s of deep concern. It’s of deep concern to many Australian businesses and their operations.

“But of course, the Australian Government will always stand firm for our values, Australia’s sovereignty, and protect Australia’s interests at every juncture.”

In November, the Chinese Embassy in Canberra released a statement outlining 14 grievances with the Australian Government, calling for an independent inquiry into the origins of COVID-19; the ban on Huawei rolling out a 5G network in Australia; Australia’s criticism of China’s actions in Xinjiang, Hong Kong and the South China Sea; raids on Chinese journalists and academic visa cancellations; and blocking 10 Chinese foreign investment deals across infrastructure, agriculture and animal husbandry sectors.

The sanctions smack of action taken by seven Chinese ministries last year to shore up domestic milk formula production by tightening regulations around imports.

Domestic sales of Chinese produced wine have fallen in recent years, from 75 per cent market share in 2015 to 50 per cent in 2019. Meanwhile, Australian wine exports to China grew from $268 million in 2015-16 to $1.75 billion in 2018-19.

IBISWorld senior industry analyst Matthew Reeves said: “The Australian wine production industry generated revenue of $7 billion in 2019-20. Of that, $2.9 billion was generated from exports. China is the dominant market for Australian wines, accounting for 36.7 per cent of export revenue last year.”

There is broad consensus the tariffs will almost entirely collapse Chinese demand for Australian wine.

The company hardest hit by the decision is Treasury Wine Estates (TWE). In FY20, China represented around two-thirds of TWE’s total Asia region earnings, and 30 per cent of TWE’s group earnings.

In terms of its share of Australia’s total wine exports to China, TWE accounts for around 40 per cent of the annual $1.3 billion market.

Treasury Wine Estates CEO Tim Ford.
Treasury Wine Estates CEO Tim Ford said the company is focused on developing channels to counter China's tariffs.

TWE CEO Tim Ford said the company was “extremely disappointed” to find its business, partners’ businesses and the Australian wine industry in this position. While the provisional measure was in place, TWE expected demand for its portfolio in China to be “extremely limited”.

“There is no doubt this will have significant impact on many across the industry, costing jobs and hurting regional communities and economies which are the lifeblood of the wine sector,” Ford said.

The company went into a trading halt on Friday as it processed the news.  

TWE sells a premium portfolio in China, with luxury and masstige wine contributing 63 per cent of volume and 91 per cent of revenue in FY20. Of the remaining portfolio, Rawson’s Retreat is the largest volume commercial brand sold by TWE in China.

TWE China’s Bin and Icon sales represent approximately 25 per cent of TWE’s annual global Penfolds allocation volumes and approximately 39 per cent of TWE’s annual global Penfolds allocation revenue.

In the four months to October 2020, total Asia EBITS was roughly $75 million and within this TWE had sold around 30 per cent of its planned FY21 China Pinfolds allocations to customers.

In an investor briefing on Monday (30 November), Ford said TWE’s response plan was to start immediately, but benefits were likely to be limited in F21, gradually meeting their potential over a two to three-year period.

“The initiatives aim to reduce the impact on earnings and maintain the long-term diversification of the business. Penfolds Bin and Icon range currently represent 25 per cent of TWE’s annual global Penfolds volume allocation. That will be reallocated to other luxury growth markets including Asian markets outside of China,” Ford said.

The company would accelerate investment in sales and marketing resources and capabilities in these markets, which include Japan, Taiwan, South Korea, Hong Kong and Vietnam.  

TWE would also reallocate luxury grape sourcing to other premium Australian brands including Wynns, Wolf Blass, Seppelt and Pepperjack, which have been significantly supply constrained in recent years.

Reeves said wine producers focusing on premium brands and quality were forecast to better survive what is going to be a difficult operating environment in 2021.

“Australia’s premium wine exports will have an easier time finding new buyers outside of China, supporting bigger players in the industry. On the other hand, exports of cheaper wines will likely face significant difficulty in the coming months.”

Prior to the announced tariffs, the industry was projected to grow at an annualised 2.9 per cent over five years through to 2025-26 to $8 billion.

The outlook for the industry has now significantly shifted.

“While these tariffs remain in place, Australia is effectively locked out of the Chinese market. Producers will attempt to divert supply towards other export markets, but the amount of product that will need to be redirected is anticipated to exert significant downward pressure on wine prices,” Reeves said.

Weaker export demand will also have a flow-on effect to the grape growing industry, which was expected to generate $1.5 billion revenue in 2021-21 and employ more than 12,000 people in regional areas.

“The domestic price of wine grapes was expected to rebound by 3.3 per cent in 2020-21, following a 5.1% per cent decline last year. However, following this move from China, the outlook for wine grape prices has significantly worsened,” Reeves said.

On 30 November, three days after his initial comments, Birmingham tempered his position: “It’s not my job to escalate things, it’s my job to try to help Australian industry through these challenging times. What we want are solutions; not name calling, not anything else, we want outcomes that enable Australian businesses and their Chinese counterparts, to be able to get on with business-to-business relationships with trade that they have built over many years.

“Let’s be really clear in understanding that it’s not just Australian businesses suffering right now. Their Chinese customers are facing disruption; the businesses they work with in China are facing disruption. There are costs to all parties and ultimately, this is bad for the global economy.

“China behaving in a way that results in greater risk, greater uncertainty for international businesses, does dampen global confidence and that’s bad for everybody.”

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