China flavour to reporting season

Some analysts are warning that the Chinese market for Australian wines will never be the same again.

As Australia-China relations improve, Thursday’s annual results from ASX-listed winemaker Treasury Wine Estates will provide an update on the state of the Australia-China wine trade.

TWE was at the forefront of the political and trade stoush in 2020 when China imposed tariffs of up to 200 per cent on Australian wine – putting paid to what was shaping up to be one of its most profitable arms and providing a body blow to other smaller winemakers with a focus on China.

The company, which is best known in China and globally for its Penfolds brand, was straight out of the starting blocks when the tariffs were dropped as of March 29 as a key sign of the improving political relationship.

TWE chief executive Tim Ford and Penfolds managing director Tom King, who lived in Shanghai for several years, can be expected to be grilled for more detail on the situation regarding sales to China in their earnings call with analysts on Thursday morning.

Ford responded to the closing of the market for Australian wines by exporting wines from its operations in France and the US into China. When the tariffs were lifted, TWE had a plan well in place to move wine from Australia back into China.

Thursday’s briefing will give an update on how it is going.

While old business relationships between Australian winemakers and Chinese buyers have been revived, it will take time for orders to be made and wine to be shipped. Some analysts are warning that the Chinese market for Australian wines will never be the same again with the slowing of the Chinese economy and changing tastes of younger Chinese.

As one wine industry executive told The Australian on Wednesday: “I don’t think we are going to go back to the heady days of Australia selling $1.2bn a year in wine to China. The market has changed.”

Treasury Wine Estates CEO Tim Ford.

One high-level Chinese visitor to Australia this week joked that young Chinese were more into bubble tea than wine these days.

But the figures for export sales for the months since tariffs were lifted are still impressive.

In a statement issued on July 15, Murray Watt, then minister for agriculture, said the wine industry had just enjoyed its highest levels of sales for bottled wine exports to China since 2019.

More than 9.8 million litres of bottled wine were exported to China in May with a total value of more than $142m. Most of this came from South Australia, which sent nearly 7.4 million litres worth $125m to China.

The minister noted that the May figures were almost $50m higher than the average monthly export value in 2019 – before Covid and before the tariffs.

The strong May figures brought the total sales since the tariffs were lifted to $228m.

China still has the potential to be the biggest market for wine and a new chapter is being written for Australian winemakers with a new generation of potential Chinese wine drinkers.

Penfolds has played a long game in China and TWE also has backed the development of a local Chinese wine industry.

Wine has become a barometer of sorts for the state of the Australia-China political relationship.

First was the imposition of the tariffs in 2020 and the speculation over their future with the improved relationship following the election of the Albanese government in May 2022.

Later that year Penfolds gave one of the first bottles of its wine made in China to Chinese ambassador to Australia Xiao Qian.

When Chinese Foreign Minister Wang Yi visited Australia in March, a few weeks before the tariffs were lifted, he quietly dropped into a Chinese-owned winery on the outskirts of Canberra.

When Chinese Premier Li Qiang visited Australia in June, he visited the Penfolds Magill Estate winery in South Australia.

Significantly, Adelaide has been chosen for the location of the latest high-level dialogue between Australia and China to take place later this week – conveniently the home of Foreign Minister Penny Wong and federal Trade Minister Don Farrell.

Sitting alongside a high-level Australian delegation including Wong, Department of Foreign Affairs and Trade head Jan Adams, and Australian ambassador to China Scott Dewar will be industry representatives including Wine Australia chairwoman Michele Allan.

Cochlear chief executive Dig Howitt. Picture: Nikki Short

Thursday also will bring the annual results from another company with an exposure to the Chinese market: bionic ear company Cochlear. Cochlear has been in the China market for more than 25 years, having sold its implants to more than 50,000 people in the country, mostly children.

The company announced in 2018 that it had launched its first offshore manufacturing plant in China with a new production plant in the southwestern city of Chengdu (better known as the home of the pandas).

With Cochlear’s operations in recent years affected by Covid, analysts are expected to ask chief executive Dig Howitt at the company’s briefing on Thursday for more details how the Chengdu plant is going and the company’s expectations of the China market.

Another ASX-listed company reporting on Thursday, global industrial property giant Goodman Group, has a significant exposure in China where it has been operating since its involvement in a Shanghai business park in 2001.

China has been a key market for Goodman given the company’s focus on logistics property and it has significant operations in Beijing, Shanghai and the southern city of Shenzhen. The company has ridden the China industrial property boom for years but it is now seeing the cooling of China’s economy.

At its third-quarter earnings update in May, the company reported that demand for warehouse space was weakening in China, where there was an oversupply situation. China is a key area for its data centres, which now make up 40 per cent of its $13bn in projects under way around the world.

Speaking to analysts at the time, chief executive Greg Goodman warned that occupancy in the China data centre market had eased back from 96 per cent to 93 per cent, noting: “China is generally pretty weak.”

On the other hand, fund manager Magellan, which also reports on Thursday, significantly has cut back its exposure to the China share story which was enthusiastically backed in the past by former chief executive Hamish Douglass.

Four different companies reporting on one day, four different China stories.