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James Kirby

China wine move widens risk across the ASX

James Kirby
Against a backdrop of escalating trade tensions investors should be pragmatic.
Against a backdrop of escalating trade tensions investors should be pragmatic.

The writing is on the wall for investors in companies where China is the key export market: the tide can turn in a moment. Just ask Treasury Wine Estates, where the share price just saw a 20 per cent intraday drop.

Trade Minister Simon Birmingham may describe China’s move to investigate the wine sector for alleged dumping as “perplexing” but to sharemarket investors the abrupt decision, which threatens to widen into a much broader challenge, is entirely predictable.

Against a backdrop of escalating trade tensions investors should be pragmatic and assume that such a “shock” can occur at virtually any listed company where China has the power to drive a better bargain.

Seasoned investors will remember a similar share price rout four years ago after Bellamy’s, the infant formula group, was hit with what seemed like a bolt from the blue. Back then China suspended Bellamy’s import licence and the share price halved in a matter of weeks.

Regulatory risk has been mounting with China-focused companies for months — particularly since the decision to ban the Huawei Telco group from 5G contracts.

The only exception here — and it will not be forever — is mining exports such as iron ore.

On the same day Treasury Wine plunged on the ASX, BHP announced strong profits and outlined how its iron ore division is now responsible for 60 per cent of all profits.

The reality in iron ore is that if China were to threaten imports of Australian products in any way, the price of the commodity would instantly surge as our major miners have that rarest of economic advantages, pricing power.

China simply must continue to import iron ore from BHP, Rio and Fortescue for now, but not so much in five years’ time when the enormous Africa based, China-backed Simandou project in Guinea comes on stream.

In contrast, Australian wine producers do not have pricing power: the wine industry is worth around $6bn. The entire wine export trade to China is worth $1bn a year, that’s petty cash in iron ore terms.

Nonetheless the wine industry is a major employer in rural areas, with a total workforce in wine and grape growing coming to around 28,000 according to research group IBISWorld.

Treasury Wine, which include brands such as Penfolds, had just been recovering in recent months, with improved sales in China prompting an upgrade from Macquarie which had acknowledged “an improved medium-term outlook and lowered risk premium on Chinese business”.

Listed companies such as Bubs or Blackmores and many more now have China-based regulatory risk as a major issue. It will not be detailed in broker research reports and it will rarely be mentioned by the executive management.

Take Tim Ford, the CEO at Treasury Wine for example. The company makes about 40 per cent of its profits from sales to China. In offering guidance to the company’s results recently, Ford mentioned just about everything relevant to the company except the one thing that was most relevant — risk in China.

China political and regulatory risk is now a clear and present danger across the ASX. Investors need to assess it, even if analysts and management executives will go nowhere near the subject publicly.

Read related topics:ASXTreasury Wine
James Kirby
James KirbyWealth Editor

James Kirby, The Australian's Wealth Editor, is one of Australia's most experienced financial journalists. He is a former managing editor and co-founder of Business Spectator and Eureka Report and has previously worked at the Australian Financial Review and the South China Morning Post. He is a regular commentator on radio and television, he is the author of several business biographies and has served on the Walkley Awards Advisory Board. James hosts The Australian's Money Puzzle podcast.

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Original URL: https://www.theaustralian.com.au/business/wealth/china-wine-move-widens-risk-across-the-asx/news-story/c46f5f1fa04aa206f985480dbafd8270