The Treasury Wine Estates Ltd (ASX: TWE) share price plunged by as much as 17% in this morning's trade, but has marginally recovered to currently sit at $10.71 at the time of writing.
This negative price movement has taken place in response to news reported by the Australian Financial Review that China is preparing to levy hefty import duties on Australian wine exports. Australia's annual exports in wine are estimated to be over $1 billion in value, the large majority of which is conducted by Treasury Wine.
These added restrictions could be a significant headwind for the wine-maker, and this is seeing a largescale market sell-off of Treasury Wine shares.
What are the details?
China's Ministry of Commerce landed the latest punch in the escalating tensions between Australia and China this morning, revealing it would investigate the alleged dumping of wine by Australian businesses.
It is believed that an anti-dumping complaint from the local Chinese wine industry sparked this investigation, which could profoundly limit Australian exports of wine to China in the coming months.
The AFR further reported that the dumping investigation would include all Australian imports of wine in containers of 2 litres or fewer.
As of May 2020, Global Trade Atlas estimated that Australia represented a whopping 37% of China's imported wine by value, with France (27%) and Chile (13%) also featuring on the podium.
In response to the revelations, Treasury Wine cited in a market announcement they would cooperate with Chinese and Australian authorities on the matter, and that the company "has had a long and respectful relationship with China over many years through its team, partners, customers and consumers."
What this could mean for Treasury Wine's earnings
This strips the wind from the wine-maker's sails just after it presented better-than-expected full-year earnings for FY20 just last week. Its share price jumped about 10% off the results, which included net profits down 25%, but a dividend of 8 cents per share and positive signs of COVID-19 recovery in the Chinese market.
The optimism shown by the market has thus been short-lived, with all of the gains from last week stripped away following this dumping investigation. It's too early to tell how this may affect Treasury Wine's earnings for the coming 12 months, but higher tariffs and less bottles of wine being consumed in China suggest one thing – lower profit margins.
Treasury Wine may just have been caught in the political crossfire between Canberra and Beijing, similar to the barley and beef industries, but nonetheless today's announcement has muddied the waters for the wine-maker's future earnings outlook.
