Fine wine auctions: hammering out the issues

The last year has seen fine wine down overall, Burgundy prices rise and fraudsters at large. Stuart George examines the auction market from 2012 to 2013.

IT WAS a funny old year. In 2012 a Korean pop singer became a global phenomenon. Venus came very close to Jupiter. And the world did not end on 21 December, as some had blamed the Mayans for predicting.

In the art auction world, 2012 was a banner year for trophy hunters, thanks to “The Scream”, Richter and Rothko. In November, auctions at Sotheby’s and Christie’s brought in $787.3 million (HK$6,105m). All this amid a financial crisis.

But the sometimes astonishing prices did little to ease growing concerns that a price bubble was swelling, that the market was becoming sickly, and that China’s once seemingly inexhaustible buying power was starting to turn lethargic. Sound familiar?

Munch’s tortured figure is probably how wine auctioneers looked when they added up their year-end figures. Total live auction sales by the big five of Acker Merrall & Condit, Christie’s, Hart Davis Hart, Sotheby’s and Zachys raised $334m (with premiums) this year, down 21% from the record $405m achieved in 2011.

The average lot price in Hong Kong last year was $6,226, 32% down on 2011 and about as much as a case of Mouton Rothschild 2005 costs these days. This is a long way from the $219,000 paid for 12 bottles of Henri Jayer’s Cros Parantoux 1985 at a Hong Kong auction in February 2012. Confidence in the fine wine market continues to be driven by vaunted prices for the rarest and most sought-after bottles.

KNOW YOUR RIGHTS

The London-based online wine exchange Liv-ex reported that five of its six major indices were down year-on-year. The worst performer was the Liv-ex Fine Wine 50, down 9.6% in 2012 and 24.7% since 2011. Generally the indices fell for the first six months of 2012 before perking up in the second half of the year.

The five-year figures for Liv-ex indices remain very sound and assert the long- term value of wine investment. As of January 2013 the Second Wine 50 had gained 146.9% since 2007, the DRC Index 79.9%, the Right Bank 100 67.4%, the Super Tuscan Index 52.8% and the Fine Wine 50 22.8%. Every time we (or the Mayans) think that the world is about to end the wine market confounds the most pessimistic predictions.

LAFITE OF CLAY

Lafite is still the most traded first growth on Liv-ex – Lafite 2009 and 2008 were the most traded individual wines – even though its volume has almost halved since 2011. It accounted for 7.5% of Acker Merrall’s turnover and is still a hugely lucrative and significant wine brand, as indeed is cru classé Bordeaux as a whole, with “off” vintages being favoured recently. But DRC, based on auction house figures, is now the Andy Warhol of the wine market – the one everybody wants above the mantelpiece.

DRC accounted for 17% of Acker Merrall’s turnover in 2012 and only two of Christie’s top 10 lots were not Burgundy. The Hospices de Beaune raised a record total, doubtless helped by the presence of the lovely Mrs Sarkozy (whose currently unemployed husband is teetotal). Burgundy’s share of trade on Liv-ex reached a record 14.5% in January 2013.

However, other Liv-ex figures suggest that auction room hype for this domaine is not all that it seems. The DRC Index reached a 10-year high in May 2012 but was down 0.9% for the year. Domaine de la Romanée-Conti’s secondary market performance has been flat but it looks good because the first growths have declined so much.

LIQUID BUBBLES

Bordeaux still has the volume; Burgundy now has the prices. Jayer and DRC are the big beasts of the fine wine world but the tiny amounts available cannot sustain a fizzy secondary market for long. As the American economist Herbert Stein said, “If something cannot go on forever, it will stop.”

Auctions still attract a lot of attention because of their sense of exclusivity, the urgency that they can create and the better prices they can offer to sellers. But paying wild sums for fine wine doesn’t necessarily signify a healthy market. High prices signify demand, nothing else. And demand, particularly in Asia, is a fickle thing. Is it a bubble or a new reality?

A bubble is defined by prices soaring in a short time – the price doubles within a few weeks or months – and there has to be widespread public participation, with plenty of news coverage and everybody talking about it. This clearly happened to Lafite 1982 in October 2010 when a few gavel blows at Hong Kong auctions sent its price from $59,350 to $132,700. By the end of 2012 Lafite ’82 was typically selling at $29,000, where it was 18 months previously and before that five years ago. It’s very difficult to call the bottom of the market but Lafite is flat at the moment and any signs of life could be a “bull trap”, looking as though it’s going up in price but it will actually decline even further.

It’s possible that Burgundy – and particularly DRC – could follow this model: hugely increased interest and prices, a sudden spike, and then a collapse back to pre-hype levels. Short- term speculators please note. Some wines will continue to fall in value; others will gain. That is the way of the free market.

THEIR EX-CELLENCY

A constant supply of sellable products is the biggest challenge for auctioneers and merchants. Wine has to be sourced from somewhere so there were more ex-cellars consignments in 2012 than ever before. Château Mouton Rothschild, Château d’Yquem (LVMH has been an enthusiastic consignee for some time), Champagne Louis Roederer, Colgin Cellars and Paul Jaboulet Aîné were among those selling their wines directly to consumers via an auction house. This is unbeatable provenance and fetches a premium, which makes for very good business for auctioneers and wine estates.

Acker Merrall’s first Hong Kong sale of 2013 on 25-26 January featured ex-cellar consignments from Domaine Dujac and Domaine Roulot. At the time of going to press Sotheby’s had recently announced that its first New York sale of the year would feature nearly 200 lots of wines direct from the cellars of Ornellaia, Dom Pérignon and Château d’Yquem.

In addition to ex-cellar consignments, expect to see more offerings from private Hong Kong cellars in 2013. Wine enthusiasts there have amassed enormous quantities of wine since taxation on imports was abolished in February 2008; there’s plenty of stock that can be sold. The first example of this will be at Christie’s on 15-16 March with 810 lots of Burgundy – and not a drop of anything else – from the cellar of Henry Tang, the former chief secretary for administration of Hong Kong.

As Gorillaz sang, “Is the rise of an Eastern sun / Gonna be good for everyone?”. There was a time when New York ruled the wine auction world, but it has been overtaken by Hong Kong and the money flooding into there from mainland China. In London’s favour are its central time zone, user-friendly currency (the euro remains perplexingly strong against the British pound, which is also weak against the Chinese RMB and Hong Kong dollar) and buyer’s premiums – as much as six percentage points lower than in NYC or HK.

WHAT’S IN A NAME?

Anonymity is used by sellers and buyers at auctions to protect personal privacy and to allow the discreet sale of items because of debt or family conflicts, for instance. However, in October 2012, during a dispute over the sale of a 19th century silver-and-enamel Russian box, a four-judge panel in New York unanimously ruled that state law has long required that buyers be given the names of sellers in post-auction paperwork for the deal to become binding. The ruling has been challenged and, as of February 2013, is being reviewed.

Rudy Kurniawan, who was exposed as a fine wine fraudster last year, sold a lot of wine at New York auctions. Ostensibly he was anonymous but buyers would surely have known that he was the consignor – after all, it was the law. The application of a similar law in London and Hong Kong would go a long way to preventing fakes and forgeries being sold.

Deadbeat bidders are also a big problem for auction houses, which happily publicise when somebody has waved a paddle and paid gazillions for a nice case of Burgundy. But what they don’t like to admit is how difficult it sometimes is to get money for these “record-breaking” bids.

Sotheby’s in particular has pursued lawsuits against defaulters at art auctions in Hong Kong, where auction bids, like contracts, are seen as a mere framework for negotiation, a starting point from which to chisel down prices. For those “flown with insolence and wine” (as Milton put it), “face” is all- important. Bidders lose it if they stop bidding (even if they have gone beyond their means) but may not bid at all if asked to pay a deposit, taking offence at this, and thus resulting in lower prices.

At Sotheby’s 5 February 2013 Impressionist & Modern Art evening sale in London it only took a single bid by telephone from Asia to win Picasso’s 1932 portrait “Woman Sitting Near a Window” – but that was enough to push the final price to over £28 million. (Tellingly, there were no bids in the room.)

China’s bao fa hu (“explosive rich”) can outbuild, outbuy and outsell all others – but they don’t always pay their bills.