In a recent development that has sent shockwaves through the market, news emerged about the shutdown of a blast furnace at Haixin Iron and Steel, a private enterprise in Shanxi. The situation was further exacerbated by banks conducting door-to-door debt collection, which triggered widespread concern. This incident is not isolated—previous cases in other regions have also seen steel factories face capital chain ruptures, with some business owners fleeing. Industry insiders warn that, given the massive scale of the steel sector, if this sporadic issue evolves into a broader trend, it could lead to consequences far worse than the previous steel trade credit crisis.
Local governments and financial institutions are urged to closely monitor the risks associated with overcapacity industries. The steel industry, long plagued by overproduction, continues to struggle with high output and costs, while steel prices and efficiency remain low. In 2012, many analysts considered it a turning point, as the expansion of China’s steel production capacity outpaced demand, creating a severe supply-demand imbalance. As a result, the industry has been teetering on the edge of profitability.
Although the domestic steel industry showed signs of recovery in 2013 due to macroeconomic improvements, the underlying issues persisted. According to Liu Zhenjiang, a senior official from the China Iron and Steel Association, the industry's performance in early 2014 was even worse than the previous two years. In January alone, key statistical units reported losses of 1 billion yuan, with 43% of companies suffering losses—an all-time high. February followed a similar trend, and some experts believe the first quarter of 2014 may be the worst since the industry entered the 21st century.
The challenges facing the steel industry are expected to continue for several years, according to Cao Huiquan, chairman of Valin Iron and Steel Group. He argues that the industry is still in early winter rather than the cold winter stage, suggesting that more hardship lies ahead.
Another critical issue is the shift from steel trade credit defaults to problems within steel mills themselves. The steel trade credit crisis, which began in late 2011, had already caused significant disruptions. By early 2014, the situation reached its peak when a major Shanghai steel trader was sued by a bank, leading to the collapse of over a third of traders. These traders played a crucial role in the supply chain, acting as a buffer for steel mills. Their disappearance has made it harder for mills to operate independently.
Environmental regulations have also added pressure to an already struggling industry. With smog becoming a nationwide issue, the energy-intensive steel sector has come under public scrutiny. Meeting emission standards can cost up to 100 yuan per ton of steel, a burden that many mills find unsustainable. For these firms, this additional cost could be the final straw.
Banks are also aware of the growing risks. A large state-owned steel group in the east recently received warnings from major lenders, making it difficult to secure new loans. At one point, the company’s cash reserves were only enough to last ten days, highlighting the severity of the situation.
While the steel trade default crisis has already tested the banking system, the real concern now lies with the potential collapse of steel mills. Experts suggest that, compared to the trade sector, steel mills pose a greater systemic risk. With total liabilities in the national steel industry reaching around 3 trillion yuan and a debt ratio of nearly 70%, the stakes are high.
Despite concerns, some industry leaders believe that a full-blown crisis is unlikely. Li Xinchuang of the China Iron and Steel Association points out that steel mill loans are typically secured with physical assets like land and equipment, unlike the fraudulent practices often seen in the trade sector. However, the actual value of these assets may be significantly lower, leading to potential bad debts for banks.
Ultimately, while systemic risks can be managed through coordination, local risks remain a challenge. Experts advise focusing on companies with high debt ratios or those involved in overly ambitious diversification efforts. These are the most vulnerable and require close monitoring.
In a way, some defaults among steel mills may be a necessary part of the industry's evolution, reflecting the "survival of the fittest." During this process, the government should ensure proper support for affected workers. As Li Xinchuang notes, better oversight of local projects could help curb excessive investment and reduce future risks.
Rubber casters,Light Duty Castor,Light Duty Chair Wheel,Pu Caster Wheel
BENYU CASTERS & WHEELS CO.,LTD , https://www.benyucaster.com