Huge debts send China’s steel industry to verge of bankruptcy
August 27, 2013 Leave a comment
Huge debts send China’s steel industry to verge of bankruptcy
Staff Reporter
2013-08-27
Eighty six of China’s major medium-and-large steel enterprises incurred more than 3 trillion yuan (US$486.4 billion) in total liabilities as of June, or a debt ratio of 69.74%, signaling that the industry is on the verge of bankruptcy, reports Beijing’s Economic Observer, citing figures from the China Iron and Steel Association (CISA). Meanwhile, the industry’s profits for the first six months of the year totaled only 2.2 billion yuan (US$356.7 million), with 35 steel enterprises, or about 40% of the total, reporting losses. However, their assets-liabilities ratio, accounts receivable turnover ratio and accounts payable turnover ratio registered a rise.Considering that the total debt of these enterprises is of over 3 trillion yuan (US$490 billion), including 1.3 trillion yuan (US$211 billion) in bank loans, steel enterprises and banks have been placed under a heavy financial burden.
Judging by the CISA figures and according to their operating conditions, steel enterprises are unlikely to repay their bank loans on their due date. An industry expert said that in less than a year, the disruption of capital rather than excess capacity could have a domino effect and pose a threat to China’s economy.
The total debt represents 1.67 times the total sales reported by the 86 firms and 1,327 times their total profits, the paper said.
Qu Xiuli, deputy secretary general of the China Iron and Steel Association, noted that since the assets-liabilities ratio was relatively high in the industry, compared with other industries, a leverage ratio of 60%-70% was normal, but if it exceeded 80% it would spell trouble.
During the first half of this year, 39 steel companies across the country reported an assets-liabilities ratio over 80%, with 15 recording a ratio of more than 90%. Meanwhile, with the government’s introduction of policies to reduce overcapacity plaguing the industry, some companies’ capital chains are likely to break, the Economic Observer said.
The difficulties faced by the steel industry ware a result of earlier excessive expansion and weakening demand amidst the economic slowdown. The CISA suggested that more efforts should be taken to tackle issues including the ongoing oversupply, and the financial strain on steel enterprises, operational difficulties and restricted foreign market access.
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