2015-11-16

Chinese Steel Industry "Sliding Into The Abyss"; Chinese New Year Could Bring Mass Bankruptcies

There's a really long article on China's steel industry heading into a long winter, a reference not only to the calendar. A steel executive named Li (a pseudonym) is quoted throughout. He currently is hearing of steel mills shutting production entirely as bank funding runs out, with local governments intervening. In order to maintain cash flow and market share, mills continue producing at a loss in what is dubbed "slow-motion suicide."

Pressure is rising:
"From the beginning of the second half of this year, this phenomenon is more obvious, we can see significant tightening of corporate liquidity."
That quote is from a manager at a steel futures trading firm who notices the producers tapping their capital more often, drawing out cash from hedges immediately after settlement.

Balance sheets are ugly, even for listed firms:
According to Reporters statistics, as of the end of the third quarter of this year, listed companies Bayi Iron & Steel [600581] , asset-liability ratio was 100.63 percent, SGIS [000717] ), Xining Special Steel [600117] , asset-liability ratio as high as 93.37% respectively, 88.38%, and another 7 debt ratio of listed steel prices more than 80%.

Loans are down, but financing costs are rising:
The end of September, China Iron and Steel Association statistics steel enterprises data shows bank loans fell 2.02% year over year, while finance costs rose 2.69%.
Mr. Li says:
"After the central bank's double cuts, long-term funding costs declined, but new lending is still difficult, this year our business lines of credit may be contracted by 30% or 40%."
The shock-wave blast from the economic slowdown and tightening credit conditions is about to hit the mills. Although there's been talk of cutting production, Mr. Li says it's very little. Most firms are stretching their funds and cutting their costs, they will produce right into the end. (That might explain this headline: World's Second-Biggest Miner Unfazed by China Growth Pessimists) Huatai Securities estimates production has been cut by about 80 million tons so far out of more than 1 billion tons.

Why so few production cuts? The reason is whether steel company, bank or government, none can bear the pain of steel mill closures.
On the one hand, on the asset-liability ratio generally higher steel prices, it must rely on the continued operation of the production line in order to maintain cash flow, bank credit guarantee loans, or enterprise funds strand breaks, will enter bankruptcy reorganization proceedings; on the other hand, steel prices bear the local GDP pressure, taxation, employment, once the closure will form a larger impact on society, can only hold the burden of losses to continue production.
Instead, the industry continues on into a darker and darker future:
"There is no good cash flow, there is no good sales demand, it is possible closures will come true, but the time will be longer, after all, local governments and banks are reluctant to see this scene. The result is that now this vicious cycle, steel getting lower and lower, but the cost has remained high, or a little bit of steel prices rise, costs rise even higher results, scissors are obvious. For example, from July this year into mid-September, the iron ore price rose from $45 dollars to $55, but from July to September, steel prices fell from 2300 yuan / ton down to 1800 yuan / ton, both sides were squeezed, it basically wiped out our profit. " Li told reporters.
Lee sees a bankruptcy wave exploding around the time of Spring Festival in 2016, in the middle and west of the country where the slowdown in demand is more acute.

Others, including Li, are trying to survive by dumping onto the world market:
"Two years ago we committed to the internationalization of the company, established a number of offices in Singapore, Italy and other places, would like to expand the sales market, this year also increased the export efforts." Lee told reporters, brothers units Shagang, Zhongtian steel is also more emphasis on overseas markets.
Global prices are 200 yuan / ton less than Chinese steel prices, but due to lack of demand, there are no buyers, so Chinese mills eat the loss and dump it, which is keeping Chinese prices somewhat elevated (important for mills since they sell more domestically):
Industry insiders, the recent domestic steel export prices and compared to already upside down 200 yuan / ton, the price for all orders of steel mills can basically losses. However, if you do not take orders from overseas, domestic overcapacity or worse, we will eventually continue down domestic steel prices, China's steel enterprises will be more difficult situation.

The piece closes with this quote from the executive:

"The past two years was the bankruptcy wave for steel traders, now begins the steel industry's slow motion suicide, slowly sliding into the abyss."

iFeng: 钢企衣衫单薄地苦熬寒冬 资不抵债钢厂已出现

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