Cognac in Asia: Earthquake and Stockpiling

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It was like a premonition, the kind of event superstitious people find irresistible. Yesterday in Wellington, New Zealand, they had a 6.5 strong earthquake. No one was harmed, but there was one victim that made headlines in the local press. The shattered remains of a bottle of Remy Martin Louis XIII Cognac, were found on the floor of Wellington's Regional Wines and Spirits following the quake. A bottle of 2001 Chateau d'Yquem, a best-year Sauternes, survived the disaster…

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After the Earthquake

Rumor has it, among people familiar with the Chinese spirits market, that the big Cognac houses have been hoarding, excuse me, piling up, stocks in Mainland China and Singapore. That, if true, would mean that the figures of the Cognac Inter-professional Bureau for Cognac (BNIC) exports are to be taken with handfuls of salt. 

The BNIC reports on how much XO, VSOP and VS is leaving Cognac, not how much is actually being sold. One can understand that the Big Houses may have overestimated China’s demand from October 2012 to, say, February 2013, past the Lunar New Year. What could they do once they got their containers there? Probably the only sensible decision was to leave the unsold merchandise in China –perhaps in the region would be a better supposition- to avoid the cost of bringing the stuff back and, surtout, a few thorny explanations for anguished shareholders and skeptical stockmarkets.

It would be hard to dispute the rationality for Hennessy, Remy, Martell and Courvoisier of keeping huge Cognac stocks in South-East Asia, waiting for the puritanical austerity drive of the Chinese Gov to wear out. It is a lot cheaper to keep stocks in China rather than in France, in fact, to keep those millions of unsold bottles in France would be more expensive than almost anywhere else… However that bet can only be won if one of these days or months (not years) Chinese officialdom goes back to business as usual. Tough stakes.

And then, there is the problematic question of the inevitable impact upon the prices in Cognac. 

Remy Cointreau said last week that cognac sales in China will continue to be weak due to “retailers reducing inventory after first-quarter revenue slid”. .. results will “remain adversely affected” in the quarter through Oct 1 “due to measures focusing on conspicuous behavior” in China

According to Bloomberg, Remy would slow exports to China to manage the amount of cognac held by retailers. By retailers or in own storehouses, it doesn’t make a big difference: the fact is that there a sizable number of cases of unsold Cognac in Asia, as significant as to warrant a warning that they won’t be sending more for the time being. Back in Cognac the big question is what is going to happen with the small producers who make a living on selling their eaux-de-vie to them.

As far as I can ascertain, prices are due to drop off the bubble-like heights of 2011 and the few brave small independents, who were crowded  by the contract-welding buyers of the Big Houses, will be able to buy their inputs at a more reasonable price. It should be the end of the bubble, even if these days’ economics and logic aren’t talking to each other.

Cognac has been monetized once again, and it’s far from being the first time. Some people have been buying Cognac as an investment –a liquid one at that, literally- and some execs have foolishly bet on prices going north forever. When any commodity is monetized, be it tulips in the 16th century in the Netherlands or Cognac today, the grim Gresham's Law will come into play. When the demand for money comes to be different from the demand for the metal (gold or silver) contained in the coins, catastrophe is nigh.

Remy shares slid 2.6% in Paris.