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China could be saviour of Australian #wine industry


China could be saviour of WA wine industryThe West Australian ©

 

Whichever way you turn China appears to be the future of the Australian wine industry.

Rapid growth in sales over the past two years, including an emerging shift to premium bottled wine and increasing interest from Chinese investors in Australian vineyards point to the first real glimmer of hope for the beleaguered wine industry.

China is already Australia’s fourth biggest wine export market, with exports increasing by 24 per cent last year, albeit off a low base. Sales have grown from $20.5 million in 2005 to $122 million in 2010 and are expected to increase by another 50 per cent to more than $200 million this year.

During the past two years WA wine exports to China have almost doubled to an estimated $10 million, although at this stage much of this in the low-value bulk end of the market with prices as low as 45¢ a litre.

The Chinese have been active in WA for the past few years, seeking both wine for their growing markets and opportunities to invest in the Australian industry. A number of recent container shipments to China have been in premium wines as the Chinese discover quality wine from Australia and other New World markets.

However, the speed with which the Chinese market really takes off may not be quick enough to save many forced to pour money into unprofitable businesses in the hope of things turning around.

For many, 2011 may be a watershed year or the year that breaks the camel’s back. An increasing number of producers have just about exhausted capital and will find it difficult to fund current operations.

For some it has been too hard. They have either sold, if they have been lucky enough to find a buyer, or ripped out the vines and turned to other forms of agriculture.

Those who have stayed and who can find one last lick of cash to stay afloat through the next two vintages may yet be able to take advantage of the industry’s change of fortune.

And while part of this may be because of good planning and persistence in trying to break into these new markets, a big part might well be the hand of God.

Rain, floods and subsequent disease throughout many of the vineyards of the Eastern States are expected to dramatically reduce the national wine grape crush. Expectations are that the total national crush could be between one and 1.1 million tonnes this year, compared to the 1.6 million tonnes in 2010. Some reports put it at closer to 900,000 tonnes.

It appears that the big companies which would normally look elsewhere, especially to WA, to buy fruit to make up the shortfall have decided to accept the lower intake and reduce production in an effort to restore some balance to their ledgers.

Only a few WA producers have been tapped on the shoulder to fill small contract orders from the east and many have been on the phone to the bigger producers within WA in a last-ditch bid to find a home for their fruit. Most have been unsuccessful and for them it is probably too late.

The Wine Export Approval Report released late last year by Wine Australia showed the volume of bottled Australian wine exported during 2010 fell by 10 per cent.

At the same time, while the volume of bottle wine exported fell, bulk wine exports increased by 21 per cent to 356 million litres, valued at $335 million — an average value of just 94¢ a litre. This contributed to a slight increase in overall exports of only 2 per cent.

Plenty of wine is being sold on the bulk market for considerably less than that.

The average value of bottled exports is still lower than it was 12 months ago. Traditional markets such as Britain and the US continued to struggle, with exports to the US down by 4 per cent and to Britain by 28 per cent.

Even these figures can be misleading, because many exporters are losing money or breaking even at best just to maintain market share against the threat from other countries. For instance, while Australia is losing market share in these markets, New Zealand continues to make significant gains, although much is in heavily discounted bulk wines.

A fundamental change in production would require more than a one-off vintage variation such as that expected this year.

But is this a short-sighted view of the industry? The infamous vine-pull scheme in South Australia during the 1980s saw huge areas of vineyards removed, yet within a few years a major replanting program was started to meet growing export demand.

The end result may well be that Australia does not have the capacity to respond to sustained demand from China and will risk losing market share and market development at a critical time to other countries also eyeing the Chinese market.

In WA, some producers with reasonable vineyard holdings have mothballed their vineyards this year, preferring to buy bottle- ready wine from other producers for less than it costs them to make it. At the moment bottled wine can be bought for less than $1 a litre while it conservatively costs about $3 a litre to produce.

These players may well be in the best position to bring their vineyards back into production if prices and the China market take off.

The question is this: the wine industry is poised to embark on a new journey, but how long can producers wait for the train to leave the station before they are forced to cash in their tickets?

 

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