Has Bordeaux's Bubble Burst?
Prices of Bordeaux’s top growths have plummeted during the past six months. A variety of factors are at play, but a major one appears to be changing conditions in China. Is Bordeaux facing a leveling off? Or a bursting bubble?
The Wine Spectator Auction Index showed a 2.28 percent drop in the last quarter of 2011, in large part because classified Bordeaux performed below average: 1982 Bordeaux slipped 7.2 percent and 2000 Bordeaux slid 9.7 percent. Similarly, the Liv-ex Fine Wine 100 Index, which tracks prices of 100 top wines, 95 percent of which are Bordeaux, fell 15 percent in 2011, with a 21 percent slide since this past July when demand for first-growths began to soften.
Three recent wine auctions in Hong Kong—held by Sotheby's, Acker Merrill & Condit and Zachys during the first two weeks of the year—brought in $18.71 million. The same three events brought in $34.59 million in January 2011. Burgundy was a big seller this year, while several top Bordeaux lots sold below estimate.
According to members of the wine trade, several factors are behind the slide. “Prices have fallen because of economic uncertainty, the very high level of stocks in the négoce, the cash crisis in which most négociants find themselves at the moment, and the fact that China is not buying at silly prices any longer,” said a manager at a leading négociant.
Investors across the globe are worried about a deep recession in Europe. “Demand and prices have definitely dropped off since July,” said Simon Staples, sales director at Berry Bros & Rudd. “A load of people are trying to get out of their wine, so they are selling, so more wine is on the market.”
There is also trepidation about a slowdown in China's economic growth and, more ominously, a Chinese real-estate bubble. Many Chinese wine distributor-importers and investors have significant real-estate investments. “Fear of the property bubble is making people anxious,” said Don St. Pierre, CEO of ASC Fine Wines, an importer and distributor with 24 offices spread across China. "There is also panic among the speculators who have been holding these wines. They are selling, so that’s bringing down prices."
One example: Prices of Lafite Rothschild 2008 and Mouton-Rothschild 2008, both given special labels to attract Chinese wine consumers, dropped 43 percent in 2011. Even the spectacular 2009 vintage is taking a hit. The 2009 Lafite, Haut-Brion and Mouton dropped 27 percent, 17 percent and 16 percent, respectively, in the last six months of 2011, according to Liv-ex.
Chinese wine investors and businesses have seen their credit lines dry up. Since mid-2011, the Chinese government has forced banks to restrict lending and hold higher reserves, part of an effort to give China a ‘soft landing’ in the global economic slowdown. That tightening of credit affects the cash supply in Hong Kong. “Quite a lot of money was transferred from Hong Kong back to China to repay the loans to banks,” explained George Tong, vice president of Wong Hau Plastic Works, his family’s toy business, and a passionate wine collector.
Hong Kong is also coping with a surprising development. “In China, there has not been a perceptible decline in the price we can sell the wine,” said St. Pierre. “But in Hong Kong prices have definitely gone down. The reason is that there has been a crackdown on cross-border smuggling over the last few months.”
The Hong Kong and Macau borders with the Mainland are notoriously porous, and until recently brokers routinely smuggled two or three bottles of classified growths across with powdered baby formula in pedestrian shopping bags. They did this to avoid the 48 percent duty imposed on wine imported to the Mainland. Brokers could buy a bottle of wine at $350 and resell it for $520. But now that they must pay duties, they can’t afford to buy the wine at $350. Without pressure from this black-market speculation pushing up prices, the market is correcting itself.
Another correction concerns the 2010 Bordeaux futures. The Chinese bought big last year, most for the first time, eager to be part of the glamour of en primeurs. They bought at record-high prices. Those prices dropped within days, if not minutes, after the release of futures from the châteaus to négociants.
When it came time for the first payment last fall, a spate of cancelled orders from Chinese customers left négociants stunned, and bankrolling the orders themselves. Many are cash-strapped and scrambling to move stock.
Despite the troubled market, there is good news for some Bordeaux producers. Prices of classified-growths like Châteaus Montrose and Lynch Bages, which were not subject to widespread speculation, have held steady, and some, like Château Cantemerle, have gained value. “Chinese buyers are becoming more aware of other Bordeaux wines. They are buying second-, third-, fourth- and fifth-growths,” said Tong. “There are a lot of high-quality wines in these categories and their prices are much more reasonable than the first-growths.”
And there is positive news for Bordeaux’s more humble winegrowers. The volume of basic Bordeaux exported to China has grown over 100 percent every month of the past year, according to Xavier Coumau, president of the Broker’s Union. And prices are inching up a few cents a bottle.
In fact, wine buyers in China and Europe are beginning to sound more like American consumers—searching for good values from Bordeaux.