Treasury Wine plans for 'severe' China tariffs as tension escalates

Treasury Wine Estates is planning for potentially severe tariffs on its exports to China and is looking to redirect wine to other international markets as trade tensions between Australia and China escalate.

Treasury said on Thursday it was examining a range of measures including passing on the cost of tariffs to Chinese customers, reallocating wine to Europe and the US, and boosting investment in overseas vineyards such as in France, which would be exempt from potential tariffs on Australian wine exports.

Treasury Wine Estates chairman Paul Rayner has told shareholders the company is committed to the Chinese market for the long term.Credit: Justin McManus

The Australian wine industry is growing increasingly nervous about the potential for a new tariff slug from China, with two separate investigations in Beijing examining Australian wine. One looking at whether Australia dumped wine at discount prices in China and the second is studying subsidies provided to the Australian wine industry by the federal and state governments.

Similar investigations by Chinese authorities into Australian barley exports led to China imposing new tariffs of about 80 per cent on Australian barley this year.

"It's a wide range of tariff scenarios, and I won't declare the actual percentages we're working to but some of them are certainly more dramatic than others," Treasury boss Tim Ford told The Age and The Sydney Morning Herald after the company's annual meeting on Thursday.

"When a decision does come down, whether that's an interim tariff, a final tariff or no tariff, we're in a position to react quite quickly, not only to deal with the business in the market there in China, but also to inform the market and our investors quite quickly on what we see as the implications," he said.

The potential wine tariffs add to the growing trade tensions between China and Australia with Chinese state media reporting a $6 billion ban on seven key Australian products is imminent. Businesses across the seafood, wine, barley, sugar, copper, coal and timber industries are bracing for a sudden halt to their exports to China on Friday.

The Chinese wine investigations are a significant threat to the $1.2 billion a year export market. China is a crucial part of Treasury Wine's profitability and while the company does not disclose its China sales, they are believed to be worth hundreds of millions of dollars a year.

The uncertainty facing Australian wine exporters to China has been amplified by news that some exporters have been told their wine will not clear Chinese customs from November 6 onwards, and by confirmation that the China Alcoholic Drinks Association has urged Chinese regulators to introduce retrospective tariffs on Australian wine.

Treasury Wine chairman Paul Rayner told shareholders the company was committed to China for the long term, regardless of rising trade tensions between the two countries. "We're preparing for a range of potential outcomes, from mild to severe tariffs, and we're undertaking detailed scenario planning to ensure we're prepared, once the investigation outcomes are known," he said.

Mr Ford said Treasury had a strong long-term future in China regardless. "Whilst the process we're going through at the moment is creating uncertainty, and I would prefer that not be the case, clearly we're certainly focused more on the medium and long term as to what the business will look like and ensuring that we have strong growth plans in the markets outside China.

"Because we're more than just China in this business. And we want to make sure that all our other markets continue to grow ... that's a big part of the risk mitigation," he said.

Meanwhile, Treasury has paused work on a potential demerger of the Penfolds label and released a September quarter trading update that showed sales in its Asia business rose 14 per cent on the prior corresponding period.

Despite the healthy update investors focused on the China risks, sending its shares down 8 per cent to $7.96 on Thursday.

In a note to clients Credit Suisse analyst Larry Gandler downgraded Treasury shares from outperform to neutral, arguing the political risk in China was "now too high". Credit Suisse also slashed its target price on Treasury from $12.30 to $8.50.

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