Treasury targets lift of China wine tariffs

Treasury Wine will hold back some of its Penfolds stock to be ready to send to China if its government were to lift its tariffs on Australian wine

Too much of a good thing - Australia has a serious wine glut.

Treasury Wine Estates will move quickly to get Australian made Penfolds wine back into the China market if tariffs are lifted, according to chief executive, Tim Ford.

Releasing TWE’s annual results on Tuesday, Mr Ford told investors that the company would be holding back some of the Penfolds it would normally sell in the first half of the financial year to be ready to send to China if its government were to lift its tariffs on Australian wine.

Mr Ford said the recent announcement that China was dropping its tariffs on the import of Australian barley had given the company “great relief that the process that was agreed upon between the two governments was a genuine process which had a good outcome for Australian barley.”

“It does give you confidence that a similar process can be followed for wine,” he said.

He said TWE, which once generated almost 40 per cent of its pre-tax earnings from selling wine to China, before the imposition of punitive tariffs in November 2020 was “waiting with bated breath” to understand the potential timeline for a similar process on the tariffs on wine.

“What that timeline might look like, I don’t know, but certainly the barley decision should do nothing other than give us confidence,” he said. The Federal Government lodged complaints to the World Trade Organisation against Chinese tariffs on Australian barley and wine which were imposed as a result of worsening political ties between the two countries.

But barley was dealt with first because tariffs were imposed on exports back in 2019.

Once the WTO released a draft report on its findings on barley, which was kept confidential, officials from Australia and China conducted four months of behind the scenes negotiations which saw China announce it was dropping its tariffs on August 4.

A similar process is expected to take place for wine although it has to await the release of a draft report on the issue from the WTO.

Mr Ford said the Federal Government and Trade Minister, Don Farrell, were “genuinely driving towards trying to achieve an outcome for our industry.”

“We are going to hold back some of our allocation of Penfolds which we would normally sell in the first half (of the financial year) for the second half of the year.

“We will do that to give ourselves the flexibility and the option should there be a wine review in this half (the six months to the end of December),-should there be a change in China -that we don’t miss that opportunity.

“If the tariffs were to come off, we could ship wine in there very quickly so we can get back into the market and start operating the market for Australian wine.”

Australia has the equivalent of more than 2.8 billion bottles of wine in storage, meaning even a quick fix to China’s trade ban on the sector will not ease the pressure on the industry any time soon, Rabobank says.

While the oversupply will deliver a silver lining for consumers in the way of good prices at the bottle shop, RaboResearch associate analyst Pia Piggott said the industry faced tough decisions about the viability of some assets, and there were also questions about the size of the Chinese market even if it did reopen soon.

Meanwhile Rabobank’s third-quarter wine report, aptly titled Swimming in Wine, says the China trade ban first implemented in late 2020 had combined with a surge in Australian wine production due to favourable growing conditions, leading to a glut.

Australia has recently made progress in trade relations with China, with similarly onerous trade barriers for barley scrapped earlier this month.

There are hopes among wine industry figures that the huge tariffs on Australian wine, which ­almost destroyed the $1bn-plus trade with China, could soon be ­removed.

But Rabobank says the sheer size of the wine glut, and changing drinking habits in China, mean such an outcome will not be a silver bullet.

Rabobank says under a best-case scenario it would still take two years to work through the oversupply, and warned that the amount of land under vine needed to fall.

“To return to balance and profitability, acreage needs to be reduced, thus over the next five years we will see rationalisation of assets throughout the supply chain,” it said.

Ms Piggott said while China’s red wine obsession delivered a decade of 18 per cent compound growth for imports from across the globe up until 2017, Chinese consumer habits were shifting.

Consumption more than halved in the five years to 2022, which also coincided with several strong harvests in Australia.

Rabobank argues that the China market hit its bottom in 2022, and there is scope for import growth.