Chinese liquidity has been a key driver of fine red wine and metal markets
As the cognoscenti flock to Bordeaux next month for the first tasting of wine from the most recent harvest, they could do worse than consult Dr Copper on the outlook for the fine wine market.
Vintages of vin rouge, rather than red metal, will be front of mind for oenophiles in south-west France but the markets share a key characteristic: they are affected by the liquidity in the Chinese economy.
China is the biggest consumer of copper, earning the metal the nickname Dr Copper for its use in divining the state of the country’s economy. A world away from the copper industry, China is also among the top five wine importers, the world’s largest consumer of red wine and the top buyer of Bordeaux reds.
“[Chinese] money supply and fine wine are pretty closely correlated,” said James Miles, co-founder and managing director of the London International Vintners Exchange, known as the fine wine exchange Liv-ex.
Both the copper price and the Liv-ex 100 Fine Wine index, which reflects the movements of 100 of the most sought-after fine wines, the bulk of which are Bordeaux, have been moving in tandem for more than a decade and rebounded from multiyear lows in 2016.
The two markets were hit by the global financial crisis, but bottomed in 2008 after the Chinese government announced its Rmb4tn stimulus package designed to ward off the effects of global market turbulence and ease concern over weaker domestic growth.
Fine wines benefited as much as the construction sector, a chief source of copper demand. Much of the Chinese money that poured into wine was government-led, said Mr Miles.
“The Chinese banks were ordered to lend to state-owned enterprises and officials not only invested their money but also they went off and partied and drank Chateau Lafite,” he said.
A further boost came as import taxes on wine were lowered in Hong Kong, the main port of entry into the Chinese market, from 80 per cent in 2006 to 40 per cent in 2007, and then to zero in 2008.
The wine market was driven by speculators based in Hong Kong, according to Philip Staveley, head of research at Amphora Portfolio Management, a wine investment business. “Speculators bought and bought and bought,” he said.
Fine wine and copper prices peaked in 2011, with worries about an economic slowdown in China depressing the red metal, while Beijing’s austerity campaign and clampdown on corruption led to a sharp drop in wine prices. “The phones from China literally stopped ringing,” said Mr Miles.
The price of Bordeaux wines favoured by Chinese clients plummeted. The 2008 vintage of Chateau Lafite Rothschild, which was ￡1,850 for a case of 12 bottles in London when it was released, rose to command ￡13,900 at its peak in 2011. This fell to about ￡5,000 a case in 2015 and is now trading at about ￡6,800, according to Liv-ex.
The relationship between wine and commodities has been tracked by wine experts and economists in recent years. In a 2011 paper, IMF economists Serhan Cevik and Tahsin Saadi Sedik looked at the oil and fine wine markets, noting they had “shown remarkable similarity”. “Fine wine prices are sensitive to macroeconomic shocks, just like crude oil and other commodity prices,” they said. Since that study, crude and fine wine prices decoupled after oil plunged in 2014 because of the supply glut.
Last year, both copper and wine rallied thanks to fundamentals, albeit different ones. Firmer than expected Chinese economic growth, the absence of the expected supply from new projects and hopes of new demand emanating from the US lifted copper, which rose 18 per cent. Wine gained 25 per cent, helped by a view that the market was oversold after five years of decline. The Brexit vote helped by making wines sold through UK merchants more affordable to overseas investors as the value of sterling slid.
Chinese investment funds and speculative money flowing back into commodities has also helped copper, while the country’s retail investors are also turning to the metal, says Nicholas Snowdon, analyst at Standard Chartered.
Chinese money has headed back to the wine market, too, but private investors and buyers have replaced the state-backed purchases that previously supported prices, say wine merchants.
Chinese buyers’ tastes are also maturing and diversifying away from Bordeaux into other areas in France, such as Burgundy as well as Californian wines and the “Super Tuscans” of Italy. Gary Owen of Berry Bros & Rudd, a leading wine merchant in London, said: “Their tastes are becoming more complex. Clients are buying a greater variety of wine.”
Mr Staveley says Chinese buyers remain just one factor to watch when assessing the outlook for fine wine. “They are a contributor but not the only contributor.”
Nor is China the only driver of the copper price, although it commands more influence on the red metal than anything else. However, both markets are sending positive signals on China. Copper is up 6 per cent this year and the broad consensus is for it to add to those gains.
“I’m looking for copper at around $6,500 by the end of 2017,” said Mr Snowdon, up from just under $6,000 a tonne at which it trades on the London Metal Exchange at present.
While a recent survey of Liv-ex members shows they expect the fine wine market to rise a further 8 per cent in 2017.
Investors in both markets will be tempted to monitor the action in the other. Anyone interested in China will keep an eye on both.