Australian wine makers will need to diversify into other markets to ensure industry stays viable in wake of China trade dispute

China’s crippling tariffs on Australian wine are creating major challenges with producers quickly trying to pivot away from the economic cash cow.

Australian wine makers will need to diversify away from China as the main export market in the long term, as ongoing tariffs stifle trade between the two nations.

Economists and investment analysts are pointing to short-term challenges while the industry attempts to shift product away from the major economy, which for years has been perceived as an exporting cash cow.

China slapped Australian wine with import tariffs of up to 212 per cent last year after Chinese investigators alleged producers were dumping wine into the Chinese market to drive down prices.

The Chinese government has been accused taking the measure to punish Australia calling for a global investigation into the origin of the coronavirus.

A note from investment house Ord Minnett on Thursday revealed wine exports to mainland China for the three months ending December had fallen 98 per cent due to the tariffs implemented on November 28.

“Exports to China will remain constrained as long as the tariffs are in place,” the brokerage said.

Economists and investment analysts are pointing to short-term challenges while the industry attempts to shift product away from the major economy which for years has been perceived as an exporting cash cow. Picture: Sam Wundke

“The challenge of reallocating wine previously sold in China to other markets is significant and is expected to weigh on industry margins, with a mix shift to lower margin countries and increased volumes to be sold in Australia.”

Investment bank Goldman Sachs said the impacts of tariffs has cast a cloud of uncertainty over the earnings potential for the country’s largest producer, Treasury Wine Estates (TWE), which is expected to release its interim results revealing the extent of the damage on February 17.

“Given the divergent forces imposing on TWE’s operations (the ongoing anti-dumping investigation and preliminary deposits imposed in China and business restructuring in the Americas), we view the outlook as highly uncertain,” Goldman Sachs said in an investor note.

Despite the challenging short term effects, NAB economist Phin Ziebell said the diversification into other markets would benefit the sector in the long term.

Investment bank Goldman Sachs said the impacts of the tariffs has cast a cloud of uncertainty over the earnings potential for the country’s largest producer Treasury Wine Estates. Photographer: Carla Gottgens/Bloomberg

“Being dependent one company or country is always a risk,” he said.

“There is an increasing conversation around diversification, there are alternative markets. (But) the challenge around that is China has just been such a large and profitable market across a number commodities.”

The economist from the major bank flagged producers may have to accept lower prices in other markets in order to move volumes of wine.

A higher Australian dollar, which is expected to hit 80 cents by middle of the year, will also impact the selling price of wine and could be an additional pressure for exporters.

Mr Ziebell said other industries crippled by China’s sanctions had been able to find new markets, such as barley, which has pivoted exports primarily to Saudi Arabia.

“There are clearly alternative markets and diversification is a good strategy for a lot of businesses to have,” he said.

“Long term, the wine industry has a lot of great opportunities. The challenge is moving into those markets and establishing relationships. It takes a long time to establish relationships with importers in various countries.”

Originally published as Australian wine makers will need to diversify into other markets to ensure industry stays viable in wake of China trade dispute