A toast to China's thirst for wine

A rush of foreign investment, particularly from China, in the Australian wine sector suggests increasing confidence of a turnaround in the industry, for years struggling with oversupply and a surging currency.

Toby Langley, director with wine industry brokers Gaetjens Langley, said he had seen a distinct increase in the number of foreign investors buying Australian wine properties. "People have been looking for a couple of years, but now they're actually buying, and China is the dominant source of investment," he said.

"Chinese entrepreneurs have seen the opportunity for that market to develop, and they see Australia as a reasonably open and free place to invest."

Recent Chinese purchases include the Barossa-based wineries 1847 Fine Wines to Chinese-owned Treasure Valley Wines and Ross Estate to Winston Wines, while Chinese company Pegasus paid $10 million for Ferngrove Wines in Western Australia's Frankland River and $6m for Stonehaven Winery in South Australia's Padthaway region.

Meanwhile, British-based agribusiness giant Vestey Group bought the Lane vineyard in South Australia's Hahndorf in November and US-based company The Wine Group, the world's third-largest wine producer, in August paid $27m to buy the Loxton Cellars Winery in South Australia's Riverland region from listed Australian winemaker Australian Vintage.

Privately held US wine major Jackson Family Wines last month bought the landmark Hickinbotham vineyard in South Australia's McLaren Vale, close to the Yangarra winery it has owned since 2001, for a price understood to be about $8m -- a price industry sources said would have been closer to $40m a decade ago.

Hugh Reimers, chief operating officer with Jackson, said growing demand in the US and China would soon outstrip Australia's capacity to supply.

"There is a light at the end of the tunnel -- we've got 5 per cent annual growth in the US and there aren't enough grapes in California to cover demand, and then there's China on top of that. We're going to need another 10 million cases a year, and most of that growth is at the top end of the market," he said.

"Australia's current grape oversupply is about 300,000 tonnes, which is not much in terms of the growth we're seeing in global demand."

China was Australia's fastest-growing wine export destination last year, with sales growing 23 per cent by value but falling 26 per cent in volume terms, reflecting a move to more expensive wines.

Sales to the US were down in both value and volume terms; however, according to industry reports, sales of wine priced at more than $US14 ($13.10) a bottle were still growing strongly.

Katie Jackson, winemaker and daughter of the company owners, described the new acquisition as a "once-in-a-lifetime" opportunity to add to her family's holdings in California, Italy, France and Chile.

Mr Langley said he saw the rash of deals as a clear sign that investors were banking on a turnaround in the wine sector.

"I don't think it can get much worse -- established players in the industry are realising that now's the time to buy valuable assets at a time when prices are low, while for the Chinese it's a new business opportunity," he said.

Helen Xu, co-owner of Chinese clothing and chemical manufacturer Shanghai Salian Industrial & Trade, bought an 80ha vineyard at Coldstream in Victoria's Yarra Valley last year and is midway through her first grape harvest, all of which will be exported to China after being vinified at a local contract winemaking facility.

"Wine is the new fashion in China . . . we didn't want to miss out," she said.

Treasury Wine Estates chief David Dearie has said the company will run short of top-quality fruit to produce its high-end wines in coming years, as demand for premium plonk outpaces the rest of the market.

Stuart McNab, chief supply officer in charge of global wine production at TWE, said the company was addressing this by upgrading production techniques at its vineyards and those of suppliers to improve quality, as well as buying new properties "very selectively". "There's still a potential oversupply overall, but there is a shortage of top-end fruit," he said.

TWE owns the Penfolds brand, including the iconic Grange, as well as Wolf Blass, Lindemans and Rosemount. "A lot of our wines are released after a few years in bottle, so we have to act now to be ready for growth in the future," Mr McNab said.

James Packer-backed investment fund Ellerston Capital last month purchased a 5 per cent stake in TWE -- a holding that is understood to be a long-term investment rather than a strategic bet taken in anticipation of a takeover.

Private equity fund CHAMP, which last year bought an 80 per cent stake in Constellation Wines, the Australian arm of US drinks giant Constellation Brands, was understood to be considering a purchase of Nufarm boss Doug Rathbone's winery businesses late last year, a move that would have greatly increased its exposure to the premium end of the wine market. Constellation Wines, now renamed Accolade Wines, owns the Houghton, Leasingham, Stanley, Arras and Yarra Burn brands, and generates about 60 per cent of revenue from offshore markets.

Credit Suisse, which is handling the sale of Mr Rathbone's wine interests including Yering Station and Mt Langi Ghiran in Victoria as well as Xanadu in WA, is understood to have fielded interest from US and Chinese buyers.

However, in a sign that he is not blind to the potential for an upturn in the market, the sale process includes several options for cornerstone investors to take a stake in the business rather than buying him out completely.