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					AUSTRALIAN CUSTOMS SERVICE
  Customs Act 1901 - Part XVB




  TRADE MEASURES BRANCH

       REPORT NO. 14




   CONTINUATION INQUIRY:

      BULK BRANDY
        EXPORTED
       FROM FRANCE




         11 January 2000
CONTENTS


1     SUMMARY ...............................................................................................1

2     ABBREVIATIONS ....................................................................................2

3 INTRODUCTION ......................................................................................3
3.1 Inquiry Process .....................................................................................3
3.2 Public Notification..................................................................................3
3.3 Goods Under Inquiry .............................................................................4

4 THE AUSTRALIAN INDUSTRY AND MARKET ......................................5
4.1 Like Goods ............................................................................................5
4.2 Industry Structure..................................................................................5
4.3 Production Process ...............................................................................6
4.4 Market Structure....................................................................................6

5 CONTINUATION OF SUBSIDY ...............................................................8
5.1 Introduction ...........................................................................................8
5.2 History of the Measures ........................................................................8
5.3 Customs Assessment of the Subsidy ....................................................9
5.4 Conclusion ..........................................................................................11

6 THE ECONOMIC CONDITION OF THE INDUSTRY .............................12
6.1 The Applicant’s Claims........................................................................12
6.2 The ADA Assessment .........................................................................12
6.3 Customs Assessment ........................................................................12
6.4 Conclusions.........................................................................................18

7 CONCLUSIONS .....................................................................................20
7.1 Submissions to the Current Inquiry .....................................................20
7.2 Customs Assessment .........................................................................21
7.3 Conclusion ..........................................................................................25

8     RECOMMENDATION.............................................................................27

9     LIST OF APPENDICES..........................................................................28
1      SUMMARY

This report presents Customs conclusions and recommendations to the
Minister as a result of its inquiry into whether the countervailing duty currently
applying to bulk brandy exported to Australia from France should be
continued.

Under the Australian legislation, countervailing duties automatically expire five
years after their imposition. The countervailing duty applying to bulk brandy
from France is due to expire on 27 February 2000. However, interested
parties are able to apply to Customs for the continuation of the duty for a
further five years beyond the expiry date.

Following an application from the Winemakers’ Federation of Australia for the
continuation of the duty, Customs initiated this inquiry on 9 August 1999.

The product under inquiry is bulk brandy - distilled wholly from grape wine -
with an alcoholic strength by volume exceeding 57 per cent and imported in
containers holding five litres or more. It is a legislative requirement that
distilled wine must be matured in wood for a minimum of two years before it
can be considered brandy and cleared for consumption. Bulk brandy is
diluted prior to bottling. The annual retail value of the Australian bottled
brandy market is estimated to be about $80 million.

From its inquiries, Customs has established that the Australian market for bulk
brandy is supplied by Australian production and by imports, predominantly
from France. While the overall bulk brandy market declined by almost twenty
per cent over the past five years, imports of bulk brandy from France
remained stable. In the same period, the market share held by the Australian
industry declined by one third to around thirty per cent.

Customs found that the Australian industry has suffered reduced sales, price
undercutting and loss of profits that could be linked to the imported subsidised
French brandy.

From information obtained during its inquiries, Customs also established that
the European Commission continues to pay a subsidy to distillers of wine to
partly compensate for the high price paid for wine. As distillation is an integral
process in the production of brandy, Customs considers that the brandy
produced in France continues to be subsidised. Customs also found that the
level of the subsidy has increased over the past five years.

On the basis of the available evidence, Customs is satisfied that the expiration
of the countervailing duty would be likely to lead to a continuation of the
subsidisation and the material injury that the duty was intended to prevent.
Accordingly, Customs has recommended to the Minister that the
countervailing duty on exports of bulk brandy from France should be
continued for a further five-year period.


                                        1
2     ABBREVIATIONS

ABS           Australian Bureau of Statistics
ACDN          Australian Customs Dumping Notice
ADA           Anti-Dumping Authority
Angove’s      Angove’s Pty Ltd, Renmark, SA
BRL Hardy     BRL Hardy Ltd, Reynella, SA
Customs       Australian Customs Service
Customs Act   Customs Act 1901
EC            European Commission
ECU           European Currency Unit
FEVS          Federation des Exportateurs de Vins et Spiritueux de
              France
FF            French Francs
hl            Hectolitre (100 litres)
lal           Litre of alcohol
Remy          Remy Australie Pty Ltd, Gladesville, NSW
No.           Number
Seagram       Seagram Australia Pty Ltd, Botany, NSW
SEF           Statement of Essential Facts
Southcorp     Southcorp Wines Pty Ltd, Nuriootpa, SA
Tarac         Tarac Industries Pty Ltd, Nuriootpa, SA
WFA           Winemakers Federation of Australia Incorporated,
              Adelaide, SA
WTO           World Trade Organisation




                             2
3     INTRODUCTION

3.1   Inquiry Process
Under section 269TM of the Customs Act, dumping and countervailing duty
notices automatically expire five years after the date on which they were
published, unless they are revoked earlier. Similarly, price undertakings
expire five years after their date of acceptance by the Minister, unless
provision is made for an earlier expiry date.

Section 269ZHB of the Customs Act stipulates that – not later than nine
months before an anti-dumping or countervailing measure expires – Customs
must announce that the notice is due to expire on a specified day and invite
interested parties to apply to Customs within 60 days for the continuation of
the measures. If no application for the continuation of the measures is
received by Customs within the period allowed in the notice, the measures will
automatically expire on the specified date.

If an application for continuation of an anti-dumping or countervailing measure
is lodged and it complies with the legislative requirements, Customs must
initiate a formal inquiry. Customs then has up to 155 days to inquire and
report to the Minister on whether the measures should be continued.

Before recommending the continuation of the measures, Customs must be
satisfied that the expiration of the measures would lead (or would be likely to
lead) to a continuance of (or recurrence of) the material injury that the anti-
dumping or countervailing measures were intended to prevent.

Where the Minister decides to continue anti-dumping or countervailing
measures, the notice will remain in force after the specified date for a period
of five years (unless the relevant notice is revoked before the end of that
period). In the case of a price undertaking, provision can be made for it to
expire after a period of less than five years.


3.2   Public Notification
By notices in the Australian Financial Review and the Commonwealth of
Australia Gazette on 21 May 1999, Customs announced that the
countervailing measures currently applying to bulk brandy from France were
due to expire on 27 February 2000. The notice invited interested parties to
apply for continuation of the measures within 60 days from the date of the
notice.

On 20 July 1999, an application was received from the Winemakers’
Federation of Australia (WFA), on behalf of the Australian brandy producers,
for the continuation of the measures for a further five years. Following prima



                                      3
facie examination of the applicant’s claims, Customs initiated this inquiry on
9 August 1999 (refer ACDN 99/030 at Appendix 1).

During the inquiry, Customs’ officers visited the premises of the following
companies:

Brandy producers: Angove’s Pty Ltd;
                  BRL Hardy Ltd;
                  Southcorp Wines Pty Ltd; and
                  Tarac Industries Pty Ltd.

Importers:          Remy Australie Pty Ltd and
                    Seagram Australia Pty Limited.

Customs also received submissions from:

             The European Commission;
             Federation des Exportateurs de Vins et Spiritueux de France;
             Lucien Bernard & Cie, France; and
             Seguin, France.

A Statement of Essential Facts on which Customs proposed to base its
recommendations to the Minister was published on 29 November 1999.
Interested parties were invited to provide submissions in response by
17 December 1999. Submissions were received from the EC and the
Federation des Exportateurs de Vins et Spiritueux de France.


3.3   Goods Under Inquiry
The product under inquiry is bulk brandy, distilled wholly from grape wine, with
an alcoholic strength by volume exceeding 57 per cent and imported in
containers holding five litres or more. It is a requirement of the Spirits Act
1906 that the distilled wine be matured in wood for a minimum of two years
before it can be considered brandy and cleared for consumption. Bulk brandy
is diluted prior to bottling.

The goods were classified under sub-heading 2208.20.10 statistical code 46
to 30 June 1999 and under statistical code 73 from 1 July 1999, in Schedule 3
to the Customs Tariff Act 1995.




                                       4
4      THE AUSTRALIAN INDUSTRY AND MARKET

AUSTRALIAN INDUSTRY

4.1    Like Goods
In the context of a dumping or subsidy inquiry, subsection 269T(1) of the
Customs Act defines like goods as follows:

        “like goods”, in relation to goods under consideration, means
        goods that are identical in all respects to the goods under
        consideration or that, although not alike in all respects to the
        goods under consideration, have characteristics closely
        resembling those of the goods under consideration.

Australian distillers produce matured brandy in concentrated form which is
sold in bulk for later dilution and bottling or is used in-house for their own
bottled brands. Like imported brandy, Australian brandy must be matured in
wood for at least two years.

During previous inquiries into brandy, Customs was satisfied that brandy
distilled in Australia was a like good to the bulk brandy imported from France.

From the evidence available in its current inquiry, Customs remains satisfied
that the brandy distilled in Australia is a like good in terms of subsection
269T(1) of the Customs Act to the bulk brandy exported from France to
Australia.

4.2    Industry Structure
Subsection 269T(4) of the Customs Act specifies that the Australian industry
consists of the producer or producers of like goods in Australia.

The application stated that the WFA represents the interest of all Australian
brandy producers. These are:

•   Angove’s at Renmark, SA;
•   BRL Hardy Ltd at Reynella, SA;
•   McWilliam’s Wines Pty Ltd at Yenda, NSW;
•   Southcorp Wines Pty Ltd at Nuriootpa, SA; and
•   Tarac Industries Pty Ltd at Nuriootpa, SA.

From the ABS statistical data on Australian produced brandy (cleared for
home consumption) over the period of investigation, Customs estimated that
the above companies produced almost 100 per cent of the total Australian
output. Accordingly, Customs is satisfied that these companies comprise the
Australian industry.


                                       5
4.3    Production Process
Most Australian brandy is produced from grapes grown in the South
Australian Riverland (the Berri-Renmark district). Brandy is usually produced
from the wine obtained from ’the least preferred’ grapes.

Distillation occurs throughout the vintage period. In Australia, the vintage
period is from January to May each year, and storage into wood usually takes
place in May and June.

The distilled wine must be matured in oak for a minimum of two years before it
is considered to be brandy. This is a requirement of the Spirits Act 1906.
When put in oak, the brandy has a strength of about 66 per cent by volume of
alcohol.

During the maturation process the brandy takes on the flavour of the oak and
also extracts colour from the oak. After the maturation period, the brandy may
be blended with other brandies to obtain the correct flavour and caramel may
be added to adjust the colour. The brandy is then diluted with distilled water
to 37.1 per cent by volume of alcohol and is filtered. Once the brandy is
bottled, no further maturation is required.

Subsections 269T(2) and 269T(3) of the Customs Act specify that for
manufactured goods to be regarded as produced in Australia:

•   they must be wholly or partly manufactured in Australia; and

•   where the goods have been partly manufactured in Australia, then at least
    one substantial process in the manufacture of the goods must be carried
    out in Australia.

Customs has examined the operations of the Australian brandy producers and
is satisfied that their brandy production may be considered “produced in
Australia”.

Customs is also satisfied that brandy produced in Australia does fall within the
legislative definition under s.269T(4B) for close processed agricultural goods.

AUSTRALIAN MARKET

4.4    Market Structure
The Australian market for brandy is supplied by Australian production and by
imports, predominantly from France.          Imports from other sources are
insignificant. Brandy is imported either in bulk or bottled form.

Imported bulk brandy is sometimes blended with Australian produced brandy.
All brandy (whether imported, locally produced or a blend of these two) enters
the Australian retail market as a bottled product.



                                       6
Customs estimates that the total market for bottled brandy in Australia in
1998-99 was about 1.5 millions lals with a retail value around $80 million.
Excise, sales tax and State licence fees account for almost two thirds of the
retail price of bottled brandy.




                                     7
5      CONTINUATION OF SUBSIDY

One of the main issues to be addressed by Customs in this continuation
inquiry is whether the expiration of the countervailing measure would lead to a
continuation, or recurrence, of the subsidised imports. This chapter examines
the information obtained during the inquiry on this issue.


5.1    Introduction
In its application for continuation of the countervailing duty currently applying
to imports of bulk brandy from France, the Australian industry claimed that
subsidies continue to be paid to French producers of brandy by the EC. The
Australian industry stated that as brandy is matured for a period of two years
prior to export, brandy benefiting from these subsidies would enter the
Australian market in the year 2001 and beyond.


5.2    History of the Measures
A summary of the countervailing duties and price undertakings imposed on
bulk brandy exported to Australia from France follows:

(i)    1984 - Price Undertaking

       In July 1984, the then Minister for Customs accepted price
       undertakings by exporters of bulk brandy from France following an
       inquiry by Customs. This inquiry established that subsidies had been
       paid and that exports of subsidised bulk brandy from France had been
       causing material injury to Australian brandy producers.

       The undertakings lapsed on 1 March 1989 under the ‘sunset’
       provisions of the Customs Tariff (Anti-Dumping) Act 1975.

(ii)   1990 - Countervailing Duty

       In June 1989, the WFA lodged an application alleging that imports of
       bulk brandy from France, at subsidised prices, were threatening
       material injury to the Australian brandy producers.

       In October 1989, Customs reached a positive preliminary finding and
       imposed a provisional countervailing duty on exports of bulk brandy.
       The Customs preliminary finding was referred to the (then) Anti-
       Dumping Authority (ADA) for final inquiry and report.

       The ADA, in its final report (ADA Report No.17), concluded that bulk
       brandy imported from France had been subsidised and had threatened
       to cause material injury to the Australian industry. In February 1990,
       the Minister accepted the ADA recommendation to impose a

                                       8
        countervailing duty on imports of bulk brandy from France. Under the
        ‘sunset’ provision of Australia’s legislation, the measure was due to
        expire in February 1995.

(iii)   1995 - Continuation of Countervailing Duty

        In August 1994, following an application by the WFA to continue the
        measure for a further five years, the ADA undertook a continuation
        inquiry.   In February 1995, the Minister accepted the ADA
        recommendation to continue the countervailing duty applying to bulk
        brandy exported to Australia from France (ADA report 141). The
        measure is due to expire on 27 February 2000.

(iv)    1999 - Application for Continuation Inquiry

        The current inquiry stems from an application by WFA to continue the
        countervailing duty for another five years.


5.3     Customs Assessment of the Subsidy
As part of its assessment of subsidies paid or payable on French exports of
bulk brandy, Customs considered submissions and information provided by
the Australian industry, the EC, the Federation des Exportateurs de Vins et
Spiritueux de France and other interested parties. Customs also extracted
publicly available information on EC regulations via the Internet

5.3.1 Current Intervention System

Under the Common Agricultural Policy, the EC pays subsidies to the domestic
producers of certain agricultural commodities. In the case of grapes this has
resulted in surpluses of wine.

In 1970 the EC adopted distillation as the process for handling wine surpluses
and regulating the wine market. Several intervention aids are available under
the umbrella of ‘distillation’.

Under the wine regime adopted by the EC (governed by EC Regulation
822/87), guide prices for various types of wine are fixed annually. Wine is
acquired by distillers at a percentage of the guide price. The rules and rates
for distillation are set each year, based on estimates of the wine production for
that year’s vintage. The distillers pay the wine producers the set price and,
provided the distilled product has a minimum alcoholic strength of 52 per cent,
distillers qualify for direct aid which partly compensates for having to purchase
wine at a high set price.

From information published by the EC, Customs identified that there are three
types of intervention aids operable until August 2000 under which a subsidy
may be payable. As the same wine can be only distilled once, it can only be
subject to one intervention aid.



                                        9
The intervention aids are:

(i)        Preventive distillation

           This is an early season measure taken where necessary, having
           regard to harvest forecasts, to improve the quality of wines being
           marketed by removing poorer quality wines (refer Article 38 of EC
           Regulation 822/87)

           In 1997-98 and 1998-99, the amount of aid payable under the
           preventive distillation aid was 1.751 ECUs per lal.

(ii)       Compulsory distillation

           Compulsory distillation of wine may be imposed when there is an
           oversupply of wine in a given wine year, in order to eliminate wine
           production surpluses. (refer Article 39 of EC Regulation 822/27).

           In 1997-98 and 1998-99, the amount of aid payable under the
           compulsory distillation aid was 1.0505 ECUs per lal.

(iii)      Support distillation

           This aid may be introduced to compensate distillers for the (artificial)
           high cost of wine when there are no compulsory distillation
           arrangements in place. Aid under support distillation may be restricted
           to distillers that have participated in preventive distillation and is limited
           to defined quantities of wine for distillation (refer Article 41 of the EC
           Regulations 822/27).

           In 1997-98 and 1998-99, the amount of aid payable under the support
           distillation aid was 2.415 ECUs per lal.

Customs found that the amounts of subsidy payable per litre of alcohol under
the above three distillation aids remained unchanged between 1996-97 and
1998-99. Customs also noted that in 1996-97 the subsidies payable were
much higher than those applying in 1992-93 (the wine year selected in the
1995 continuation inquiry). For example, the amount payable under the
prevention distillation aid rose from 1.48 ECUs to 1.751 ECS per lal.

The following intervention aids have been activated since 1994/95:

   Wine year        Distillation Aid        Level of aid           Aid in French
                       activated              ECU/lal               Francs /lal
        1994/95       Preventive               1.450                  9.5845
        1995/96       Preventive               1.751                  11.5745
        1996/97       Preventive               1.751                  11.5745
                        Support                2.415                  15.9637
        1997/98       Preventive               1.751                  11.7101
        1998/99       Preventive               1.751                  11.7101


                                             10
Aid in French Francs has been calculated using Agricultural Conversion Rates
provided by the EC. The EC advised that these rates have been replaced by
the Euro:FF conversion rate from 1 January 1999.

Customs notes that the subsidy provided by the EC under the preventive
distillation aid has been the most commonly used distillation aid in recent
years.

Customs also notes that the type of distillation assistance provided by the EC
constitutes an actionable subsidy under the WTO Agreement on Subsidies
and Countervailing measures.

5.3.2 New Intervention System

EC Regulation 1493/99 provides details for a new intervention system for the
wine market due to come into place on 1 August 2000. With this new system
of intervention, primary aid and secondary aid will be the new distillation
measures applicable to the potable alcohol sector only.

According to the Regulation, primary aid “shall be paid on the basis of the
volume of table wine and wine suitable for yielding table wine which is
distilled” and “implemented on the basis of a system of contracts concluded
between distillers and wine producers”. No other details were available to
Customs. The minimum price to be paid to wine producers by distillers is yet
to be advised.

Secondary Aid will take the form of a payment to cover reasonable storage
costs of the resultant product. It facilitates the operation of the primary aid
system.

At the time of writing this report, application rules and levels of aid for the new
intervention system have not been fixed.


5.4    Conclusion
On the basis of the information available, Customs concludes that a
countervailable subsidy continues to be provided by the EC for the distillation
of wine. In turn, this provides direct assistance to the producers of brandy in
France. As a result, the brandy exported to Australia from France continues
to be subsidised.




                                        11
6       THE ECONOMIC CONDITION OF THE INDUSTRY

Customs must consider whether the expiration of the countervailing measure
is likely to lead to a continuation, or recurrence, of the material injury that the
measure was intended to prevent. For this reason, Customs examines in this
chapter the economic condition of the Australian brandy producing industry.


6.1     The Applicant’s Claims
In its application, the Australian industry claimed that:

        “…Should the current measures be discontinued, it is clear that there
        will be a return to the circumstances that led to the imposition of
        measures in both 1984 and 1990 and continuation of the measures in
        1995. By their previous behaviour, French exporters and Australian
        importers have demonstrated that, in the absence of measures, it is
        likely that large quantities of bulk subsidised French brandy will be
        imported into Australia…”


6.2     The ADA Assessment

In its continuation inquiry in 1995, the (then) Anti-Dumping Authority examined
the Australia industry over the period 1990-91 to 1993-94 and found that:

•     the Australian industry’s suffered reduced sales and market share for both
      bulk and bottled brandy;

•     the Australian industry’s average selling price of bulk and bottled brandy
      had increased;

•     there had been some price undercutting of the Australian industry’s prices
      of bulk brandy by French imports of bulk brandy;

•     the prices of brandy bottled from imported French bulk brandy had been
      consistently below the prices of the Australian product; and

•     profits and profitability of the locally produced bulk brandy had improved,
      while profits and profitability of bottled brandy had declined but remained
      at reasonable levels.



6.3     Customs Assessment
Customs visited the premises of the four major brandy producers to verify the
financial information provided in the application and subsequent submissions.


                                        12
Based on this material and other information, Customs has analysed the
Australian industry’s performance over the period 1994-95 to 1998-99.

Customs found that the major Australian brandy producers may be divided
into three categories:

(i)        Angove’s and BRL Hardy

           Distil and produce bulk brandy mainly for in-house bottling. Both
           companies sell a small volume of bulk brandy to other users (eg for
           fortification);

(ii)       Tarac

           Distills and produces bulk brandy for in house bottling and for sale to
           independent bottlers; and

(iii)      Southcorp

           Purchases distilled wine spirit to produce bulk brandy for in-house
           bottling and for sales to an independent bottler.

Seagram and Remy are the two importers of bulk brandy from France.
Seagram bottles imported French brandy, whereas Remy currently blends
French brandy with Australian brandy. Neither importer sells French bulk
brandy in Australia.

Although Customs obtained details of Australian produced bulk brandy and
imports of bulk brandy, any changes in the volume or value of these do not
necessarily reflect the reality of the Australian brandy market.

For this reason, Customs examined both the bulk and bottled brandy markets
in Australia over the period 1994-95 to 1998-99. The common unit of
measurement used in both markets is litres of alcohol (lals).

6.3.1 Volume Trends and Market Shares

Bulk Brandy

In assessing the market for bulk brandy, Customs used information provided
by the Australian industry on its sales of bulk brandy and information provided
the Australian Bureau of Statistics (ABS) on imports of bulk brandy. Imports
of bulk brandy are entered on what is defined as a Customs Nature 20 entry
(ie warehoused into bond).

Customs found that between 1994-95 and 1998-99:

•       the Australian market for bulk brandy declined by 19 per cent;

•       sales volume by the Australian industry to independent bottlers declined
        by 45 per cent; and


                                          13
•   volume of imports of bulk brandy remained stable;

    -   imports of bulk brandy from France account for nearly 100 per cent of
        all imports.

The market share of bulk brandy held by the Australian industry decreased
from 45 per cent in 1994-95 to 31 per cent in 1998-99.

Over the same period, the market share held by imports of bulk brandy
increased by 14 percentage points to 69 per cent.

Details of Customs analysis of the Australian bulk brandy market are at
Confidential Appendix 3(i).

Bottled Brandy

Customs assessed the market for bottled brandy by adding the total sales of:

•   locally produced bottled brandy, including brandy bottled by local
    producers and by independent bottlers (cleared from bond and entered on
    a Customs Nature 40 entry); and

•   all imports cleared from bond - that is brandy imported in bottles and
    brandy bottled from imported bulk brandy (entered on a Customs Nature
    30 entry).

Customs used published ABS statistics for both sets of data. The import data
may be slightly overstated as the data includes goods not under inquiry, such
as brandy based liqueur. However, an extraction from the Customs
commercial database showed that the goods not under inquiry accounted for
a minor proportion of imports. Therefore, Customs is satisfied that the
analysis provides a reasonable indication of market trends.

Customs found that between 1994-95 and 1998-99:

•   the sales volume of Australian produced bottled brandy declined by 24 per
    cent;

•   total volume of imported brandy remained fairly stable; but that

    -   imports of bottled brandy increased by 39 per cent;

    -   imports of bulk brandy, bottled in Australia, declined by 28 per cent;

•   the brandy market (bottled) declined by 15 per cent.




                                        14
The following graph illustrates the Australian market for brandy:
                                               Australian Brandy Market (Bottled)
                                                cleared for hom e consum ption
                      2,000,000

                      1,800,000

                      1,600,000

                      1,400,000
  Litres of Alcohol




                      1,200,000

                      1,000,000

                       800,000

                       600,000

                       400,000

                       200,000

                             0
                            1994-95              1995-96            1996-97             1997-98            1998-99

                                  Total Australian brandy market
                                  Domestic sales of Australian produced brandy
                                  Total imports of brandy
                                  Imported bulk brandy, bottled in Australia, cleared for home consumption
                                  Imported bottled brandy cleared for home consumption



The following graph illustrates the trend in market shares:

                                        Australian Brandy Market Shares (Bottled)

                         80%

                         70%

                         60%

                         50%

                         40%

                         30%

                         20%

                         10%

                           0%
                            1994-95            1995-96           1996-97           1997-98           1998-99

                                      Domestic sales of Australian produced brandy
                                      Imported bottled brandy cleared for home consumption
                                      Imported bulk brandy, bottled in Australia, cleared for home consumption



Between 1994-95 and 1998-99, the market share in the bottled brandy market
held by the Australian industry showed a downward trend, the share held by



                                                                      15
imports of bottled brandy showed an upward trend, while the market share
held by brandy bottled from bulk imports decreased.

Details of Customs analysis of the Australian bottled brandy market are at
Appendix 3(ii)).

6.3.2 Price Trends

Price Depression

Price depression occurs when an industry, for some reason, lower its prices.

Customs examined and verified the information on the net selling prices
provided by the four major Australian brandy producers on their sales of bulk
brandy and bottled brandy covering the period 1994-95 to 1998-99. These
producers accounted for over 95 per cent of the sales volumes of the
Australian bulk brandy producers. In effect, these major producers were the
Australian industry.

Bulk

Customs found that for the period 1994-95 to 1998-99 the weighted average
selling price of bulk brandy of each of the major producers remained relatively
constant. The analysis also showed that in 1998-99 the weighted average
selling price of the Australian industry was slightly below that recorded in
1994-95.

Bottled Bandy

Customs found that the Australian industry’s weighted average selling price of
bottled brandy showed a small increase in each of the four years since
1994-95. The graph below illustrates the weighted average selling price trend
of the Australian industry for both bulk brandy and bottled brandy:

                                                          Australian Industry
                                                    Weighted Average Selling Prices
                A$ per litre of alcohol




                                          1994/95    1995/96        1996/97      1997/98         1998/99

                                                        Average selling price - bulk brandy
                                                        Average selling price - bottled brandy



                                                               16
Price Undercutting

Price undercutting occurs when the imported product sells below the
Australian industry equivalent.

Bulk

Customs compared the Australian producers’ selling prices of bulk brandy to
independent bottlers with the landed into bond costs of the bulk brandy
imported from France covering the period 1994-95 to 1998-99.

The analysis showed that the landed into bond costs of the imported French
bulk brandy constantly undercut the selling prices of some of the Australian
producers throughout the five year period.

Bottled

Customs found that in respect of bottled brandy, the selling prices of bottled
brandy produced from imported French bulk brandy consistently undercut the
selling prices of brandy made from Australian bulk brandy covering the period
1994-95 to 1998-99.

Price Suppression

Price suppression occurs when the margin between the industry’s costs and
prices is reduced.

Bulk

Customs analysis shows that the margin between the Australian industry’s
sales revenue and overall costs of bulk brandy fluctuated over the five years.
Customs notes that in 1995-96 and in 1998-99 the Australian industry
suffered significant price suppression on bulk brandy.

Bottled

Customs found that the margin applying to sales of bottled brandy by the
Australian industry also fluctuated over the five years, but not the same extent
as bulk brandy. Customs notes that in 1998-99 the Australian industry
suffered significant price suppression on its sales of bottled brandy.

Details of Customs analysis of price trends are at Confidential Appendix 4.

6.3.3 Profit

Customs found that the major Australian bulk brandy producers were
profitable overall on their sales of bulk brandy in 1994-95, 1996-97 and 1997-
98 with the greatest profit achieved in 1997-98. The industry suffered a loss
in 1995-96 and 1998-99.




                                      17
In respect of its sales of bottled brandy, Customs found that the Australian
industry was profitable in each year between 1994-95 and 1998-99, but that
the profits fluctuated. Profits peaked in 1995-96 and were at its lowest in
1998-99.

The following graph shows the combined profits achieved by the Australian
industry on its sales of bulk brandy and bottled brandy over the period 1994-
95 to 1998-99. It shows that profit peaked in 1997-98 and then declined
significantly in 1998-99:

                                Australian Brandy Industry
                                       Bulk/Bottled
                                           Profit
                A$




                     1994/95   1995/96        1996/97   1997/98    1998/99




6.3.4 Profitability

The Australian industry’s profitability on sales of bulk brandy (profits
expressed as a percentage of sales) peaked in 1997-98 but was negative in
1995-96 and 1998-99.

Profitability on the Australian industry’s sales of bottled brandy fluctuated over
the period 1994-95 to 1998-99. Profitability declined by two percentage points
between 1994-95 and 1998-99.

Customs also analysed profitability achieved on the combined sales of bulk
brandy and bottled brandy. The analysis showed a similar pattern as that for
profitability on bottled brandy. Profitability declined by one percentage point
between 1994-95 and 1998-99.

Details of Customs analysis of profits and profitability are at Confidential
Appendix 5.


6.4    Conclusions
Customs’ analysis of the available data for the period examined has shown
that, since the continuation of the measures in 1995:

•   the Australian industry has suffered reduced sales and market share in a
    declining market for both bulk brandy and bottled brandy;

•   the Australian industry’s selling price of bulk brandy declined marginally,
    while its selling price of bottled brandy showed a slight increase; and

                                         18
•   the Australian industry has suffered price undercutting from imported
    French brandy;

Customs also found that in 1998-99 the Australian industry recorded a loss on
its sales of bulk brandy and showed a significant decline in profit on its sales
of bottled brandy.

On the basis of the available evidence, Customs considers that the Australian
brandy industry experienced injury in 1998-99 from some cause or causes.




                                      19
7      CONCLUSIONS
Subsection 269ZHF(2) of the Customs Act states that

        The CEO must not recommend that the Minister take steps to
        secure the continuation of the anti-dumping measures unless
        the CEO is satisfied that the expiration of the measures would
        lead, or would be likely to lead, to a continuation of, or a
        recurrence of, the dumping or subsidisation and the material
        injury that the anti-dumping measure is intended to prevent.

It is important to note that the test to be applied by Customs is a positive one.
In other words, Customs needs to be satisfied that material injury caused by
subsidisation is likely to occur. Customs is not able to recommend that
measures continue on the basis that it cannot be satisfied that these events
will not occur (ie. a negative test).

The main issue to be addressed by Customs in this continuation inquiry is
whether the expiration of the countervailing measures would be likely to lead
to the recurrence of material injury to the Australian brandy producing industry
caused by subsidised imports of bulk brandy from France.


7.1    Submissions to the Current Inquiry
In summary, the Australian industry claimed that:

•   since the continuation of measures in 1995, the subsidisation on the
    distillation of French bulk brandy has continued;
•   there is no indication of removal of the subsidies payable; and
•   as brandy is aged in wood for two years before export, brandy receiving
    these subsidies will enter the Australian market in the year 2001 and
    beyond.

The Federation des Exportateurs de Vins et Spiritueux de France (FEVS)
summarised its initial submission as follows:

•   there are no subsidised exports of bulk brandy from France; and
•   even if Australia were to determine that subsidisation exists, the average
    import price for brandy imports in bulk from France is consistently higher
    than the NIFOB price.

The subsequent submission from FEVS in response to the SEF may be
summarised as follows:

•   under the WTO rules, the Australian authorities have to demonstrate that
    the injury caused by the alleged subsidies will be maintained or recur if
    countervailing duties are terminated. This proof must be in accord with
    Article 15 of the Subsidies Agreement;

                                       20
•     the volume of “subsidised” distillations in France declined in the last five
      years and now account for less than 10 per cent of the global French
      brandy production. This means there has been no increase in subsidised
      import volumes;
•     there has been no price undercutting by French brandy because the
      import prices have been increasing (and above the NIFOB level) over the
      last five years;
•     there has been no significant depression of domestic prices as imported
      brandy prices have not been below the NIFOB level for the past ten years;
•     there is no substitution between imported and domestic brandy. The
      volume of imported brandy has been stable while that of the domestic
      brandy has been decreasing in an overall declining market;
•     the Australian brandy producers have incurred increased costs through
      higher grape prices and this, rather than imports, has caused injury;
•     there is no causal relationship between the subsidised imports and the
      injury to the domestic industry

The gist of the points made by FEVS was supported by the EC in its two
submissions to Customs. The EC also pointed out that it had undertaken
commitments in the context of the WTO Agreement on Agriculture to reduce
agricultural support measures from 1995. As a result, WTO members agreed
(under Article 13 of the Agreement) to exercise “due restraint” in initiating any
countervailing duty investigations for agricultural products. The EC stated that
this provision was reinforced where a continuation of existing countervailing
measures was under consideration.


7.2      Customs Assessment
Under the Australian legislation (and the WTO Subsidies Agreement), there
are three issues to be addressed in considering whether the countervailing
duty in this case should be continued. These are whether

•     there is likely to be a continuation of the subsidisation of the imported
      goods;
•     there is likely to be a recurrence of material injury suffered by the
      Australian industry; and
•     there is a causal link between the subsidised imports and any likely
      recurrent material injury.

Each of these issues is addressed in the following.

(i)      Continuation of Subsidisation

From the evidence obtained during this inquiry, Customs is satisfied that there
is a countervailable subsidy paid by the EC for the distillation of wine. In its
submission, the FEVS argued that the subsidies are received by the wine
producer and not by the brandy producer. One of the aims of the EC
regulatory system is to decrease the volume of wine in the wine market
through distillation.


                                         21
This same point was raised in the previous continuation inquiry. Like the ADA
then, Customs considers that distillation is an integral process in the
production of brandy. Therefore, any distillation aid paid or payable by the EC
is considered to be a subsidisation of the production process of brandy.
Accordingly, Customs considers that the brandy produced in France
continues to be subsidised.

The FEVS submission in response to the SEF claimed that only part of the
total French brandy production was subject to the subsidy for distillation. This
was stated to amount to less than ten per cent of the total production in the
past two years. However, in the absence of any supporting evidence for this
claim, Customs considers there is insufficient detail available to warrant
further consideration of this matter at this late stage of the inquiry.

Customs noted the provisions of the WTO Agreement on Agriculture where
the EC had undertaken to reduce support to the agricultural sector from 1995.
In return, WTO members had agreed to exercise “due restraint” in initiating
new countervailing duty investigations.

Notwithstanding the EC commitment to reduce support to agriculture,
Customs found that the amount of each distillation aid (or subsidy) paid by the
EC increased in 1995-96 and then remained steady until 1998-99. For
example, the preventive aid which was activated by the EC in each of the past
five years increased from ECU 1.450 in 1994-95 to ECU 1.751 in 1995-96.
That is, a 20 per cent increase.

Although a new EC intervention system for the wine market is due to come
into force in August 2000, the details were not available at the time of
preparation of this report. Nevertheless, Customs notes that distillation aids
will continue to be payable.

Under Australian law, distilled wine must be matured in wood for a minimum
period of two years before it is considered brandy. This means that brandy
produced in France and sold in Australia in 2000 would have received subsidy
assistance at least two years previously. Therefore, brandy produced with the
assistance of subsidies in France in 1999 would be expected to be available
for export to (and sale in) Australia in 2001, at the earliest.

Conclusion

Based on the evidence available, Customs is satisfied that the production of
brandy in France continues to be subsidised. Customs is also satisfied that it
is likely that brandy produced in France and exported to Australia for the
foreseeable future will be subsidised.

(ii)   Recurrence of Material Injury

From the evidence obtained during this inquiry, Customs has found that the
Australian market for brandy has declined over the past five years. In this
context, the Australian bulk brandy industry has suffered both reduced sales
and market share. The average selling prices of the major Australian bulk


                                       22
brandy producers have remained relatively constant over the period but there
has been a slight decline in each of the last three years. Profit levels for the
Australian industry have been varied over the past five years except for 1995-
96 and 1998-99 when losses occurred.

Based on the evidence available, Customs concluded that the Australian bulk
brandy industry suffered injury in 1998-99 from some cause or causes.

One of the functions of this inquiry is to establish whether there is likely to be
a recurrence of material injury to the Australian bulk brandy industry in the
absence of the countervailing duty. To this end, Customs has examined
relevant economic factors and these are covered in the following.

The volume of subsidised imports of bulk brandy from France has remained
relatively unchanged over the past five years. In this regard, Customs notes
that virtually all imports of bulk brandy are sourced from France. As noted
earlier, the Australian market for bulk brandy has been declining over the past
five years as have the sales volumes by the Australian industry.

In relative terms, Customs notes that there has been a significant increase in
the volume of subsidised imports of bulk brandy from France over the past
five year period. Over this period, the imports of subsidised bulk brandy from
France increased from 55 per cent to 69 per cent of the Australian bulk
brandy market.

Before considering whether there has been price undercutting by the imports
of French bulk brandy over the past five years, it is important to outline the
nature of the countervailing measure in place. As the original countervailing
measure was imposed in 1990 as a minimum export price, it is not affected by
the legislative changes that introduced specific duty amounts from 1993.

The countervailing duty on bulk brandy has been set as a minimum export
price based on the NIFOB. In other words, an export price at the FOB point
that is “Non-Injurious” to the Australian industry. Under this arrangement,
countervailing duty is only paid where the export price is below the NIFOB.

In these circumstances there is an incentive for the exporter to price at or
above the NIFOB. This has occurred throughout the past five years where
the export prices of bulk brandy from France have remained relatively
constant at or marginally above the NIFOB level.

Customs notes that the current NIFOB level is based on 1993-94 Australian
industry cost data. As a result, any comparison of contemporary export prices
with the prevailing NIFOB does not reflect commercial reality. Customs has
established that the average cost to make and sell bulk brandy by the
Australian industry throughout the last five years varied significantly.
However, when compared with the average costs in 1993-94, the comparable
costs in 1998-99 showed a noticeable increase.

Customs analysis showed that throughout the last five years, the imported
French bulk brandy frequently undercut the average selling prices of the major


                                       23
Australian bulk brandy producers. As the bulk brandy is ultimately sold in
bottled form, Customs noted the prices of bottled brandy produced from the
imported French bulk brandy considerably undercut the Australian produced
bottled brandy throughout the last five years.

In these circumstances, Customs is satisfied that there has been significant
price undercutting by the imported subsidised French bulk brandy to the
selling prices of the Australian bulk brandy producers over the past five years.

Analysis of the sales revenues and costs to make and sell for the Australian
bulk brandy producers shows that there has been significant price
suppression occurring in 1995-96 and recently in 1998-99. Over this period,
the selling prices of the Australian industry remained relatively constant but
the increased costs removed any profit margin.

For the three years from 1996-97, Customs noted that the average Australian
industry selling price for bulk brandy declined slightly. In 1998-99, this decline
resulted in a loss for the Australian industry. Accordingly, while there has
been price depression suffered by the Australian industry, Customs would not
regard the extent of the price depression as significant.

Customs examined the profit levels of the major Australian bulk brandy
producers over the past five years and found that losses had been incurred in
1995-96 as well as 1998-99. Customs considers that the extent of the loss of
profit in 1998-99 was significant.

Conclusion

Based on the evidence available (and verified, where possible), Customs is
satisfied that the Australian bulk brandy industry has suffered significant loss
of market share, price undercutting, price suppression and loss of profit over
the past five years. These factors have been particularly evident in 1998-99.
In this context, Customs considers that any further price pressures would be
likely to lead to a recurrence of material injury to the Australian bulk brandy
industry.

(iii)   Causal Link

In addressing whether there is a causal link between the subsidised imports of
French bulk brandy and the likelihood of a recurrence of material injury to the
Australian industry producing bulk brandy, Customs examined the known
major factors involved.

The FEVS submission pointed to other factors such as the increasing level of
excise taxes on brandy sold in Australia and the overall decline in demand in
the brandy market in Australia over the past ten years as having an adverse
impact on the Australian brandy industry.

The FEVS submission pointed out that the costs of the grapes for distilling by
the Australian brandy industry would be a major variable in the industry’s cost
structure. In summary, the FEVS submission stated that, although the French


                                       24
imported brandy prices were lower than those of the Australian industry during
the last few years, this was because of the increased costs faced by the
Australian industry.

Customs notes that the input costs for the Australian bulk brandy producers
differed between those sourcing their grapes from their own stocks for
distillation and those purchasing distilled wine from market suppliers. The raw
material costs for the in-house producers remained relatively stable over the
past five years. In comparison, the producers reliant on purchasing market
supplies of distilled wine incurred a modest increase in costs over the same
period.

Notwithstanding the claims about increased raw material costs and other
factors affecting the Australian brandy market, Customs is satisfied from its
analysis of the evidence that the overriding determinant in the market is the
price of French brandy. This provides a recognisable and consistent
reference point in the Australian brandy market. It follows that the price level
of imported French brandy has a marked influence on the selling prices of the
Australian industry product.

Conclusion

Customs has established from its inquiry that the Australian bulk brandy
industry has suffered significant losses through price related factors. As the
imported subsidised French brandy has maintained a substantial (and
increasing) presence in the Australian market through consistent pricing at or
marginally above the 1993-94 NIFOB level, Customs is satisfied that this is
the major price pressure faced by the Australian brandy producers.

From this, Customs concludes that there is a causal link between the
imported subsidised French brandy and the likelihood of a recurrence of
material injury to the Australian bulk brandy industry.


7.3    Conclusion
The pattern of export prices to Australia of subsidised French brandy over the
past 10 years (for which the current countervailing measure has been in
place), has been consistently a reflection of the level of the NIFOB applicable.
Although there has been some increase above this level by one of the French
exporters in the latter part of the period, the pattern has altered little over the
period.

As the NIFOB has served as a minimum export price for this period, Customs
is satisfied that removal of the countervailing measure would be likely to lead
to a reduction in the export price of the subsidised French bulk brandy.

With the Australian bulk brandy industry suffering a loss of profits, price
undercutting and price suppression in 1998-99, any further price pressure
would be expected to exacerbate these factors. The removal of the
countervailing duty on imported subsidised French bulk brandy would be likely


                                        25
to exert such pressure on Australian market prices. Customs considers that
the impact of this on the Australian industry would be likely to lead to a
recurrence of material injury.

The evidence relied upon by Customs in this inquiry is listed at Appendix 2.




                                      26
8     RECOMMENDATION
Customs recommends that the Minister:

•    be satisfied that the expiry of countervailing measure applying to bulk
     brandy exported to Australia from France would lead, or be likely to lead,
     to a recurrence of the material injury which the countervailing measure
     was intended to prevent; and

Accordingly, Customs recommends that the Minister:

•    continue the countervailing measure currently applying to bulk brandy
     exported to Australia from France after 27 February 2000;




                                      27
9          LIST OF APPENDICES

1             ACDN No 99/030 dated 9 August 1999

2             Evidence relied upon by Customs

3(i)*         Bulk Brandy Market

    (ii)      Bottled Brandy Market Analysis

4*            Price Trend Analysis

5*            Profit and Profitability Analysis




*             Confidential appendix – not included in the report that is
              available to the public




                                        28

				
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