China is one of the largest manufacturers and consumers of iron and steel products. The steel industry in China has developed over several decades into the biggest in the world. China accounts for nearly 50% of world steel production. It has been driven by rapid modernization of its economy, construction, infrastructure and manufacturing industries.
The Chinese steel market has been caught in a financial dilemma in recent years. Steel mills are confronted with both severe financial strains and a slump in demand and prices. On one hand, the general oversupply situation in Chinese domestic iron and steel industry became intense, while the pace of growth in the major downstream steel-consuming sectors decelerated so that the demand for steel products declined, leading to a plunge in steel price. In particular, the real estate market of China, the most voracious consumer of steel, is shrinking. Production cuts are slower than the contraction in demand, therefore oversupply is worsening. On the other hand, many steel mills have continued their production activities to maintain cash flow and market share, even though the production will cause more financial losses and make funding tight.
Banks are tightening the loans to steel mills. Financing remains an acute problem as banks strictly restricted lending to the steel industry. Many steel mills found their loans difficult to extend or were asked to pay higher interest. Some steel mills have to rely on shadow banks for funding at a higher interest. From the environmental prospective, steel plants in China have been targeted as a major source of the air pollution. Efforts by the Chinese Ministry of Environmental Protection under the Action Plan for the Prevention and Control of Air Pollution has resulted in pressure on certain regional steel mills to employ environmental protection measures, which will add further cost pressure to the steel industry.
It is reported that medium- and large-sized mills incurred losses of RMB28.1 billion yuan (USD4.4 billion) in the first three quarters of 2015. Crude steel output in the country fell 2.1 per cent to 608.9 million tons in the first nine months of 2015, while exports jumped 27 per cent to 83.1 million tons, official data shows. More importantly, some steel mills have become insolvent. A survey in 2015 indicates that the average debt to assets ratio of the 67 sample steel mills is 68.35%, while the debt to assets ratio of 5 steel mills has exceeded 100%. Signs of corporate difficulties are mounting.
Haixin Iron & Steel Group, a private steelmaker that halted production in March of 2014 because of a capital shortage, filed bankruptcy restructuring procedures in a local court in 2014. It is reported that Haixin Group has RMB10.5 billion yuan of debt, compared with 10.1 billion of assets. The court approved the bankruptcy restructuring application in 2015. According to the restructuring plan, a subsidiary of Hebei Jianlong Group will acquire Haixin’s equity. Following the acquisition, Haixin will spin off its debts and enter into a restructuring procedure. Hebei Jianlong Group will then provide funds of no less than RMB 3.7 billion yuan via capital contributions or lending to pay off the debts.
Another influential event in steel industry occurred in October of 2015. Sinosteel Co, a state-owned steel trader, failed to pay interest due on bonds of RMB 2 billion yuan maturing in 2017. China’s steel mills face some of their worst conditions ever. The outlook is the worst ever amid unprecedented losses. If the China steel market remains stagnant, Haixin and Sinosteel’s case might be followed by other market players.
China’s own economic slowdown has led Chinese producers to seek export markets as their home demand has stalled. According to Eurostat, the EU’s statistics agency, EU steel imports into the UK cost on average 897 euros a tonne in 2014, while Chinese steel imports were just 583 euros a tonne – leading to accusations that it is selling at unfairly low prices. We have previously looked at the effect of the fall in global steel prices on the UK steel industry. This week has seen the announcement of over 750 job losses by Tata Steel at their Port Talbot plant in Wales. Karl Koehler, chief executive of Tata Steel’s European operations, said: “We need the European Commission to accelerate its response to unfairly traded imports and increase the robustness of its actions. Not doing so threatens the future of the entire European steel industry.”
Any such action taken by the European Commission may help European steel companies but would make the future for Chinese steel manufacturers even more uncertain.