By Emma Rumney
LONDON (Reuters) – High Chinese tariffs on EU cognac would leave French companies with large quantities of cognac that could be difficult to sell elsewhere, according to calculations by Reuters, analysts and investors who fear the companies could be forced to make discounts.
China opened an anti-dumping investigation into brandy imported from the European Union in January, raising fears that brandy could suffer a blow similar to that suffered by Australian wine when China introduced tariffs of up to 218.4%.
Australian wine exports to China, worth $1.1 billion in 2019, were almost completely wiped out by high tariffs.
While it is a worst-case scenario, some analysts have been pondering what such an outcome would mean for the cognac industry and major French spirits makers such as Pernod Ricard and Remy Cointreau.
Chinese President Xi Jinping was scheduled to visit France on Monday. French authorities would lift the country’s investigation into cognac during the visit, French officials said during a recent press conference.
The “future” of the cognac industry depends in part on tariffs being avoided through such negotiations, industry association Bureau National Interprofessionnel du Cognac (BNIC) said in a statement on Thursday.
China was responsible for 19.4% of exports in 2023, according to data from BNIC. The Chinese market is also more profitable than others.
While low fares can be covered by price increases with relatively little disruption, higher fares could deal a substantial blow to that demand, said Laurence Whyatt, an analyst at Barclays.
Remy and Pernod declined to comment. Its shares fell more than 16% and 5.7%, respectively, compared to before the investigation was announced.
The BNIC said the biggest impact would be on 4,400 winegrowers and their families, as well as the entire cognac ecosystem and economy of the Cognac region in southwestern France.
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There were 2 billion bottles of cognac aged in barrels in France in 2023, 97% of which were destined for export markets, BNIC data showed.
If China’s share remained at around 19%, it would mean that at least 368.6 million bottles of aged cognac would go to China in the future, according to Reuters calculations based on this data. Some of this will age for a decade or more.
France shipped just over 35 million bottles of cognac to China last year, the BNIC says. If shipments continued at this rate, more than 175 million bottles would go to China over the next five years.
If high tariffs hit demand hard, dealing with all that inventory would be a key challenge for producers, Whyatt and two investors said.
“They keep all that cognac in a warehouse north of Bordeaux. It’s very difficult to see how they’re going to solve this problem,” Whyatt said.
Sales are declining sharply in the other big cognac market, the United States, and other markets are relatively small, meaning cognac could not be sold easily elsewhere.
A key risk is that companies will be forced to reduce prices, hurting margins and brand value, agreed Whyatt and two investors.
However, companies would seek to avoid this, said Chris Beckett, head of equity research at Quilter Cheviot, a Pernod investor.
One option would be to age shares longer, he added, although this would affect companies’ working capital.
The worst-case scenario was unlikely, said Oliver Adcock, fund manager at NS Partners, an investor in Remy and Pernod, adding he was hopeful Brussels could resolve the dispute quickly.
Australia’s conflict with China has been more severe, agreed an industry source, who asked not to be named ahead of Xi’s visit, adding there was no indication that demand for brandy from China would change significantly.
(Reporting by Emma Rumney in London; additional reporting by Michel Rose in Paris; editing by Alex Richardson)
