The dramatic shift in supply and demand caused by China’s tariffs on Australian wine means producers are moving away from bottled exports and towards bulk. The change is putting “significant downward pressure” on prices, reveal industry leaders.
The upheaval in Australia’s wine industry caused by China’s imposition of swinging tariffs of up to 212% at the start of this year has been made clear by the sector’s export figures.
However, there has been one glimmer of hope amidst the gloom; a considerable surge in bulk exports compared with wines bottled in Australia.
Bulk exports rose by more than 11% to a record A$576.8 million (£311m) in the 2020-21 financial year, but shipments of bottled wine fell by 15%.
The reason? China’s tariffs do not affect wines shipped in containers larger than two litres, which means that bulk shipments are not subject to them.
However, despite the spike, bulk shipments to China fell in 2020-21 to A$34.1m from A$55.4m in 2019-20, suggesting that Australia’s wine industry is resigned to losing much of a previously key market in the longer turn and is concentrating on alternative markets.
Even so, Tim Ford, the chief executive of Australian Wine Estates told last week’s annual meeting that the company was not abandoning the Chinese market over the longer term.
The UK continues to dominate Australia’s bulk wine exports, taking A$304.9m worth of wine to be bottled here in 2020-21. That represented a 32% increase on the previous year, the last full period before the effects of the pandemic were felt and China’s import tariffs were announced.
As lockdowns were imposed and bars and restaurants were forced to close, consumption swung massively from premium priced wines bottled in Australia to the commodity end of the market which bulk wine shipments typically serve, largely catering to supermarkets and multiple retailers.
The trend was underlined by Germany, Denmark, Belgium, the Netherlands, France, Sweden and Finland all increasing their bulk wine shipments from Australia in 2020-21.
This surge is expected to continue as wine originally earmarked to be bottled and sent to China becomes available to bulk shippers, putting downward pressure on prices.
Over recent years the rising prices of Australian wine caused by strong demand from China meant fewer bulk wine export volumes, particularly to the price-sensitive UK market. But that trend is reversing.
Bulk wine is shipped in 24,000-litre containers. A similar “box” container can carry only 10,000 litres of bottled wine, so Australian exporters are viewing anxiously the soaring cost of freight caused by the lack of vessels available as the world economy picks up.
Many large commercial producers established bottling operations or partnerships overseas in the late 1990s and early 2000s to reduce shipping costs and move packaging closer to the point of consumption.
With the dramatic recent shift in demand and supply dynamics, the trend away from bottled wine exports is bad news for many Australian grape growers and small to medium-sized premium producers. But it could be further good news for bulk wine exporters.
Major players include Accolade Wines (which owns the Hardy’s brand), Kingston Estates, Austwine, De Bortoli, Casella and Australian Vintage.
The country’s biggest wine group, Treasury Wine Estates, had begun to shift its business toward the premium, bottled-in-Australia market, with China taking almost 40% of its overseas sales before Beijing imposed its tariff penalties.
Being hit by China’s tariffs and the loss of more than a third of its export market means that Treasury has revamped its business model to focus on premium wines, notably the Penfolds brand which was subject to widespread faking in China, and to develop other Asian markets, notably in South East Asia.
But Australia’s shippers have not switched to the bulk market in the past year simply because of China becoming effectively closed to them.
In an interview with South Australia’s InDaily, Jim Moularadellis, Austwine’s chief executive, said the timing of Brexit, the recent free trade agreement between the UK and Australia and the impact of COVID-19 on buying patterns had all also been factors in the shift to bulk wine shipments to Britain.
“Prices are down because of the policy change in China so all of a sudden Australian wine has become much more competitive and I think there will be continued levels of good growth of Australian wine in the UK because of lower prices,” he said.
“Because the nature of the market has a bias towards shipment in large containers, the overall market has grown because of Brexit and the free trade agreement and therefore bulk wine has grown.
“During the pandemic, anything that was sold through supermarkets got a free kick but anything sold through restaurants, hotels and catering businesses fell flat and typically those are the more expensive wines that are packaged closer to the point of production rather than the point of consumption.”
By volume, bulk wine accounted for 60% of Australia’s exports in 2020-21, a significant increase on the long-term average of 55%. Volumes rose by 5% to 416.6m litres while average prices increased by 6% to a record A$1.38 (0.75p) per litre.
Industry leaders expect prices to fall as Wine Australia’s 12-month rolling export data reflects the full impact of China’s tariffs. Chris Byrne, head of Australian Commercial Wine Producers last week highlighted the shipping problems caused by a shortage of containers and ships.
He told INDaily: “We’re seeing very significant delays and very steep increases in the cost of shipping because of the tightening of that container and shipping market. “We’re also going to see a significant overhang of red wine in the coming 12 months. The demand will remain but whether or not we can satisfy the demand because of the shipping is problematic and I think because of the overhang then inevitably the supply/demand circumstance is going to put significant downward pressure on the price per litre of all Australian wine.”
A further complicating factor is the record 2021 bumper high-quality harvest of 2.03m tonnes. That would normally be a cause for celebration, especially as it followed the droughts and bushfires that affected growers in 2019 and 2020, the effect of which was to reduce Australia’s wine stocks to their lowest since 2011.