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Australia's Treasury Wine diverting China-bound wine over hefty tariffs

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Treasury Wine Estates will most likely divert about 1.5 million cases a year from China to other markets by 2023, said Bank of America analyst David Errington.

Sydney

AUSTRALIA'S Treasury Wine Estates Ltd said on Monday that it would divert hundreds of thousands of cases of China-bound wine to other countries to avoid hefty tariffs, battering its shares as it acknowledged its future in its biggest market was unclear.

After Beijing imposed a 169.3 per cent mark-up as part of an industry-wide anti-dumping investigation, the world's largest listed winemaker said that it would redirect sales of its prized Penfolds label to the US, Europe, elsewhere in Asia and domestically.

The move shows a star of Australian consumer exports to China rewriting its strategy almost overnight as a five-year-old free trade agreement between the countries - which had eliminated wine tariffs - gives way to strained diplomatic relations.

"We are moving on with a plan . . . to build the markets outside of China, and that's what we'll continue to do," said Treasury CEO Tim Ford, who started in the role in July. "A strategy of hope's not a very good strategy."

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Some of the wine to be redirected was already in port in Shanghai, Mr Ford added. A quarter of the company's upper-range Penfolds wine would be affected by the about-face, added the company, which makes about a third of its profit in China.

Treasury shares fell as much as 12 per cent in early trade on Monday, against a slightly weaker broader market. The stock is down a third since China announced the anti-dumping investigation in August.

"China . . . has been a cornerstone market for TWE in growing sales in its top end wines. And the loss of China as a market is expected to be a setback," said Bank of America analyst David Errington in a client note.

Treasury will most likely divert about 1.5 million cases a year from China to other markets by 2023, and China's earnings contribution to the company would almost halve by then, Mr Errington added.

The shake-up adds to the challenge already facing Treasury in the US, where Australian winemakers have struggled for years with a perception of low quality, plus competition from Europe, South America and non-wine alcoholic drink categories such as whisky.

Mr Ford said that Chinese demand had helped raise the Penfolds price, but "as we've now built the brand with those price levels around the globe, now the consumers are willing to pay that (and) we are not going to discount price to move volume".

The Australian government said that it may appeal the Chinese tariff at the World Trade Organization, and Trade Minister Simon Birmingham predicted a "hellishly tough time for Australia's winemakers" until it was resolved.

A China Daily editorial over the weekend said that the tariffs "should not be wrongly interpreted as a sign of a trade war", but that Canberra needed to do more to repair ties with Beijing.

Mr Ford said in a statement that Treasury would cooperate with the China investigation but "we call for strong leadership from governments to find a pathway forward". REUTERS

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