Navigating oversupply in Australia’s wine industry

Even early removal of Chinese anti-dumping tariffs would not be enough to prevent Australia’s wine industry facing several years of oversupply, Rabobank says in its newly-released Wine Quarterly Q3 2023 report.

 

Improving trade relations between the two countries and the recent removal of Chinese tariffs on Australian barley has led to optimism that five-year tariffs placed on Australian wine in March 2021 may be removed early.

 

However, the Rabobank report says, even in a “best case scenario”, with tariffs removed this year and Chinese consumption of Australian wine recovering quickly, this would “not be a panacea” with Australia’s wine industry still facing at least two years to work through its current wine surplus.

 

While this isn’t good news for Australian wine makers, there is an upside for consumers, says report author RaboResearch associate analyst Pia Piggott, with the oversupply keeping prices of many quality Australian red wines at reduced levels.

 

So large is the current oversupply, says Ms Piggott, that Australia has the equivalent of 859 olympic swimming pools worth of wine in storage.

 

 “That’s over two billion litres of wine, or over 2.8 billion bottles of the wine,” she said.

 

The Rabobank report says Chinese anti-dumping tariffs placed on Australian wine had led to significant disruptions for Australia’s wine industry, with Australia’s value of exports decreasing 33 per cent over the past two years.

 

Ms Piggott said with the tariffs coinciding with significant growth in Australian production and logistics bottlenecks from COVID, the Australian wine industry is now dealing with inventory oversupply which is depressing prices – particularly for commercial red varieties.

 

Unfortunate events

 

China’s red wine obsession was undoubtedly central to Australia’s wine industry success story in the late 2010s, Ms Piggott said.

 

“Driven by sustained economic growth, rising incomes as well as the social status of wine drinking and gifting, global wine imports to China grew at an impressive 18 per cent compound annual growth rate (CAGR) in the decade up to 2017 – when they peaked at 750 million litres – elevating China to be a top five wine importing nation globally,” she said.

 

“In the four years following the China-Australia Free Trade Agreement in 2015, the tariff on Australian wine reduced from 14 per cent to zero per cent, helping to double Australia’s market share in China from 12 per cent to 24 percent.”

 

Ms Piggott said over this time China became a strong value market for Australian red wine varietals – making up 18 per cent of Australia’s export volume and 40 per cent of export value at its peak.

 

“When a slew of Chinese anti-dumping tariffs and soft bans hit various products exported by Australia in 2020/2021, wine took the most notable hit, losing about one third of export value from its peak in 2019,” she said.

 

“Unluckily, the tariff coincided with an exceptional growing season,” Ms Piggott said, “and Australia’s largest crush on record”.

 

“Wine production for the ’21 vintage increased 36 per cent year on year, which would have in any case caused an oversupply.

 

“This coincided with COVID, logistics bottlenecks and inflation which were major hurdles in the way of plans to grow and diversify exports. Thus, two plus years into the tariff, prices of Australian commercial red grapes have significantly declined, and oversupply issues remain,” she said.

 

Wine consumption in China

 

The wine market in China has been contracting in recent years, Ms Piggott said, with consumption more than halved from its peak in 2017, to just 880 million litres in 2022.

 

“Chinese consumers began transitioning away from wine as part of a broader decline in alcohol consumption on a per capita basis, however declines were greater for wine than beer and spirits,” she said.

 

“COVID lockdowns and the economic slowdown curbing discretionary spending have also played a role in declining consumption to levels not seen since the 1990’s. Despite only Australia being hit by tariffs, the past five years has seen volume declines in imports from nine of the top ten supplying countries, as consumers become more price sensitive.”

 

Rabobank projects that China’s consumption has reached the bottom in 2022, and while there is considerable uncertainty, there is upside potential for growth in imports as on-trade premises reopen and the urban middle class have more disposable income to spend wining and dining.

 

“Positively, some Australian brands have maintained brand awareness and presence on retail shelves in China throughout the tariff period, by expanding their range of products from origins outside Australia,” she said.

 

“And grey trade has also grown significantly over the tariff period, reflecting that to some extent product substitution has not been sufficient in the market. While Australia is price competitive, investment will be required to rebuild market share.”

 

Sip happens

 

The Rabobank report said despite competitive pricing, a valuable brand and quality product, it has been difficult for Australia to grow total exports in the absence of the Chinese market over the last few years.

 

“In a push to move volume, bulk wine has grown from 55 per cent pre-tariff to over 60 per cent of exports and as long as stocks need to be shifted as bulk shipments, prices will remain depressed,” Ms Piggott said.

 

“In the United Kingdom, Australian imports have fallen from their peak in 2020 as off premise consumption of wine declines following COVID reopening.

 

“In the United States bulk wine has grown to represent 25 per cent of imports from Australia, with increasing volumes and declining average value,” she said. 

 

“In 2023 and onwards we expect the UK and US will remain key export markets for Australian wine, however some headwinds remain. In the UK, implementation of new alcohol duty rates will increase duties payable on a typical bottle of Australian wine by 20 per cent (750ml at 12.5 per cent alcohol).”

 

Ms Piggott said these duty increases are greater than the new Australia-UK Free Trade Agreement’s benefit of zero tariff on Australian wine. “Thus, penalties for Australian wine are worse under these new regulations, and there will be further margin pressure in the market, weighing on growth of Australian exports to the UK,” she said.

 

Strategic considerations

 

The Rabobank report said the Australian wine market will remain in oversupply for a considerable length of time. “To return to balance and profitability, acreage needs to be reduced, thus over the next five years we will see rationalisation of assets throughout the supply chain,” it said.

 

Ms Piggott said for vineyards, margin pressure from both ends will remain high for some time, particularly for uncontracted vineyards with a high mix of red varieties.

 

“For wineries, particularly those selling commercial wine, stocks will remain high for some time as businesses slowly work through selling inventory. While some brands have increased bulk shipments and been able to heavily discount stock, this will need to continue for some time to rebalance the market,” she said.

 

And for large retailers/investors with diverse income streams, the current market provides ample buying opportunities as distressed vineyard/winery assets come up for sale, Ms Piggott said. “Through this we can expect increased consolidation of vineyards and wineries as businesses invest to expand their distribution.”