China announced on Friday that it is imposing tariffs of 107.1% to 212.1% on wine imported from Australia beginning on 28 November. Clearly, this is a substantial hit to the Australian wine industry as China is currently its biggest export market. Over the first nine months of 2020, China made up 39% of Australia’s total wine exports by value, dwarfing its next biggest market, the US, which accounted for 15%.
Our initial assessment is that Australia’s bulk wine market will feel the sharpest pain. China’s decision follows an investigation by the Chinese ministry of commerce that assessed that Australian wine was being dumped into the country, damaging China’s domestic industry.
The fine wine category will also suffer to some degree in the short term. However, the low production quantities of premium wines and their long ageing potential could help soften the blow. Additionally, the fact that China reduced tariffs on Australian wine to zero early last year could mean that there is a healthy existing supply of Australian fine wine in China, potentially reducing the immediate impact the new import tariffs will have on market pricing.
However, the longer tariffs remain in place, the more their effects will be felt. From an investor’s standpoint, more severe price dislocation could create some longer-term opportunities to acquire high end Australian labels at attractive levels. Other wine producing regions with free trade agreements with China could become beneficiaries of this tariff. We have previously discussed the improving Chilean wine market, which benefits from strong demand from China. Currently, Chile is China’s third biggest source of wine after France and Australia.
To try to gauge the potential impact on figures, we can look at the recent US tariffs on wines from France, Germany, Spain and the UK. According to US Census Bureau data, imports of French wine fell to USD57.1 million in November 2019 when the tariffs began to bite, a 56% drop from the previous month. This figure does not bode well for Australia as the US tariffs were 25% and applied only to wine with 14% or lower alcohol levels. With the Chinese tariffs both higher and applying to all Australian wine, we expect the drop in Australian exports to China to be far greater. Among the producers that will suffer a hit include Treasury Wine Estates, which counts premium wine Penfolds among its brands and saw its stock fall by around 12% following the news.
It is early to predict how the market and Australian producers will react. Australian wines may be able to fill the gap resulting from the current US tariffs on some European wines. However, a Joe Biden presidency could ease the trade dispute with the EU, returning French and other European wine imports to their normal levels. In our view, southeast Asia appears as a relatively untapped market and its proximity make it a natural fit for Australian exports.