By Nicki Bourlioufas
Shares in Australia’s largest wine producer, Treasury Wine Estates (TWE), have recovered slightly after the company was hit with a temporarily 169% tariff on its wine exports to China, as TWE seeks to sell its surplus wine elsewhere, make more in France or even China to avoid the 169% tariffs.
TWE said it will implement a series of plans to reduce the impact of temporary anti-dumping measures on its exports to China, as announced by the Chinese Ministry of Commerce (MOFCOM) on 27 November 2020. The Chinese government said local wine producers had sustained “substantive” damage from Austrailan wine dumping, though the Australian government has said it will fight the decision. Australian winemakers will face temporary tariffs of between 107.1% and 212.1% on exports. The tariffs will be in place for up to four months, or until late March, though the period may be extended to nine months (28 August 2021).
TWE said it would reallocate its Penfolds Bin and Icon range from China – which represents 25% of TWE’s annual global Penfolds allocation volumes – to other key luxury growth markets “where there is unsatisfied demand”, including other Asian markets, the US, Europe and Australia. The company is also considering making more wine from its existing production facilities in France to avoid the tariffs, and potentially China.
TWE’s shares have been battered as a result of the tariff request, China’s anti-dumping announcement and the COVID-19 pandemic, falling to around $7.87 on November 5, their lowest level since January 2016, according to Bloomberg data, before recovering slightly to over $10 in mid November, then falling back below $9 after the latest announcement. The were quoted around $8.70 on 3 December. This is dramatically down on their 52-week high of $19.20.
UBS analysts Aryan Norozi and Jarrod Chisholm said key upside risks for TWE shares are a potentially improvement in China-Australia trade and/or increased confidence on wine re-allocation. Key downside risks are balance sheet pressures, with TWE’s cash flows likely to slow with exports to China. UBS has a $9.20 target on TWE shares.
Treasury said it is examining a range of measures including passing on the cost of tariffs to Chinese customers, reallocating wine exports 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.
TWE, which also owns the Lindeman’s and Wolf Blass global wine brands, reportedly makes up around 40 per cent of the annual $1.25 billion in Australian wine exports to China. Accolade Wines, Pernod Ricard, Australian Vintage, Brown Brothers and Changyu-owned Kilikanoon were also hit with 160.6% tariffs, respectively. Casella Wines, owner of the gugely successful export brand Yellow Tail, was slapped with 160.2% tariff.
TWE chief executive Tim Ford said: “We are extremely disappointed to find our business, our partners’ businesses and the Australian wine industry in this position. We will continue to engage with MOFCOM as the investigation proceeds to ensure our position is understood. We call for strong leadership from governments to find a pathway forward. The strength of our brands, including Penfolds, combined with our diversified business model will allow TWE to implement a range of changes and plans that will enable us to manage through the significant impact of these measures going forward.”
TWE also said on 5 November that the potential demerger of its Penfolds business has been paused, with TWE now assessing an “internal operating model” to deliver long-term value.