Treasury Wine Estate (ASX: TWE) has moved to give China the flick after admitting that the government's crippling tariff regime will hammer trade in the country.
The shares of Australia's largest wine producer slumped a further 6 per cent today as they resumed trading following last week's announcement that China would impose tariffs of up to 212.1 per cent on imported Australian wines.
The move was in response to the preliminary findings of a Chinese investigation alleging Australian producers are dumping wine into the market at the expense of its own producers.
Treasury says the measures will hit its exports of two litres or less to China with a payable duty of 169.3 per cent on its high end Penfolds wines until at least August 28 next year.
There is no certainty at this stage whether the tariff regime will not be extended.
In the meantime, Treasury concedes demand for its wine in China would be limited.
While Treasury intends to 'engage respectfully' with the Chinese Ministry of Commerce, it is effectively implementing plans to decouple its business from China, in the near term at least.
The measures will have limited effect this financial year and are likely to take two to three years to benefit the company's bottom line.
China currently represents 25 per cent of total exports of Treasury's Penfold Bin and Icon range. The company plans to redirect these sales to other luxury growth markets in Asia, as well as Australia, the US and Europe.
Treasury is also implementing cost-cutting measures and it plans to reduce its vintage intake plans, implying a reduction in production, from next year.
The Chinese market represented about two-thirds of Treasury's Asian sales in FY20, or about 30 per cent of the group's total earnings.
Treasury Wines CEO Tim Ford says he is 'extremely disappointed' that the company has been placed in this position and has called for 'strong leadership' from governments to seek a resolution.
"We will continue to engage with (China's Ministry of Commerce) as the investigation proceeds to ensure our position is understood," he says.
"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.
"However, there is no doubt this will have a significant impact on many across the industry, costing jobs and hurting regional communities and economies which are the lifeblood of the wine sector."
Ford says Treasury Wines continues to work with its customers and partners in China to "demonstrate our long-term commitment to the growing number of Chinese consumers who enjoy our brands".
Business News Australia