Game Over For China's Steel Industry: Chinese Banks Pull ￥140 Billion In Loans and Hike Interest Rates; Steel Mills Have No Cash

The credit situation is such that, steel mills maintain their production because as soon as they stop production, the banks run over and demand their loans. Recently a large mill in Tianjin stopped production due to losses and called loans, and the local government stepped in along with the CBRC the solve the problem.

Currently the steel industry is about ￥3 trillion in debt, about half is bank loans, and banks have pulled about 10% of their loans, or ￥140 billion. At the same time that banks are pulling credit, they are also hiking interest rates. One estimate says steel mill financing costs are up 22%, and even state owned industries are facing higher costs because the government has removed preferential policies.

Chairman of the China Chamber of Commerce for Small and Medium-Sized Metallurgical Enterprises, Zhao Zixi, said that banks don't lack money, this is a bank policy to restrict lending. Since inventory and receivables are rising and steel companies have an average debt ratio of 70%, and accounting profits mainly come from slower depreciation and selling assets, bank credit is these companies' life line. Pull credit and the company must die. Source: 银行对钢铁业狂抽贷1400亿 钢厂不敢停产

Meager China steel profits in 2014: Moody's

The net profit margin of large and medium Chinese steel companies has fallen to zero as capacity growth has exceeded demand growth, Moody's said, anticipating that demand growth for steel in China will slow next year.

Steel mills are operating at 0% profit margin and their cost on about ￥1.26 trillion in loans (taking out the ￥140 billion pulled) is up 22%. It's unclear how many of the loans are now at higher rates, but this represents a potential increase in costs of ￥280 billion.

From 2013: China’s Debt-Laden Steel Industry On The Brink Of Bankruptcy

The latest figures from the China Iron and Steel Association reveal that 86 of China’s large and medium-sized steel companies accumulated more than 3 trillion yuan ($486.4 billion) in debt by the end of June. This puts the debt-to-asset ratio of these firms at close to 70 percent – a big red (pardon the expression) flag. Of this debt, 1.3 trillion yuan is in outstanding bank loans.

The steel industry, compared with other industries, tend to have a higher leverage ratio, CISA Deputy Secretary General Qu Xiuli told the Economic Observer. While a leverage ratio of 60 percent to 70 percent is normal, anything above 80 percent spells trouble.

During the first half of this year, 39 steel companies across China reported debt-to-asset ratios exceeding 80 percent, with 15 above 90 percent.

From 2014: Default risks surge at China steel mills

“Looking at profitability, it is clear why the smaller mills are making the largest cuts (in production) – for the first time in the history of the steel survey not one smaller mill reported that they are making money,” a Macquarie report on the survey said (see chart).

Colin Hamilton, analyst at Macquarie Capital (Europe), said that March usually brought an improvement in the key metrics of steel orders, production levels and profits relative to February as the economy revs up following the Chinese new year holidays. This year, however, has been defined by the deepening gloom besetting the industry.

Apparently the situation is even worse than it looks because mills are not stopping production in order to avoid losing credit.

Put it all together and it looks like lights out for the steel industry.

Also: China steel mills have no cash to meet smog standards -industry body

Credit controls imposed on China's debt-ridden steel sector have left many producers unable to afford upgrades needed to survive the country's war on pollution, and 80 million tonnes of capacity could shut in two years, an industry official said.

Zhao Xizi, chairman of the All-China Chamber of Commerce for Small and Medium-Sized Metallurgical Enterprises, said that in some regions, around 70 percent of firms could not pay for the renovations needed to meet tough new environmental standards, and with loans to the steel sector cut by around 10 percent since the beginning of the year, banks have been unable to help.

......While China plans to cut its steel capacity by a total of 27 million tonnes this year, it still saw a net capacity increase of 4.68 million tonnes over the first quarter, Zhao said.

That's because, as we saw above, firms must operate to avoid a loss of credit, which would quickly lead to bankruptcy.

If the Chinese government's goal is pollution reduction, then bankruptcy is a really fast way to get those production numbers lowered. Nothing will clean the air faster than a good old fashioned recession.

This is a newspaper inforgraphic on Chinese steel from an August 2013 post. On the right hand side is an image of an iPhone, then some meat, then a popsicle. These are the profit margins on a ton of steel over the past several years.