The steel industry has long been plagued by overcapacity, and recent developments highlight just how fragile the sector has become. In recent years, the industry has operated under a "two highs and two lows" model: high production, high costs, low steel prices, and low efficiency. According to Wu, a manager at the consulting firm "Steel House," 2012 marked a turning point as China's steel production capacity expanded faster than demand, creating a severe supply-demand imbalance. Many steel mills are now barely breaking even. Although the domestic steel industry saw some recovery in 2013 due to improved macroeconomic conditions, the underlying issues remained unresolved. Liu Zhenjiang, vice president of the China Iron and Steel Association, noted that the first two months of 2014 were particularly tough, with key enterprises losing over 1 billion yuan and nearly 43% of companies reporting losses. Analysts believe that the first quarter of this year could be the worst since the steel industry entered the 21st century. However, some argue that this "worst" may not yet be the true worst, as economic growth slows and steel demand becomes increasingly constrained. Resolving the massive overcapacity will take time and will likely involve a painful, prolonged adjustment period. Cao Huiquan, chairman of Valin Iron and Steel Group, believes the industry is still in early winter, not yet reaching the peak of its difficulties. He warns that the challenges will persist for several more years. Meanwhile, the steel trade credit crisis, which began in late 2011, has already caused significant disruptions. In February of this year, the situation reached a peak when a prominent Shanghai steel trader was sued by a bank. Over one-third of traders have since disappeared, leaving many steel mills struggling to maintain operations. As Qiu Yuecheng from the Xiben Shinkansen platform explained, steel traders act as a buffer in the supply chain, helping mills manage orders and cash flow. Their absence makes it harder for mills to operate independently. Another major challenge comes from the strict enforcement of environmental regulations. With smog spreading across the country, the energy-intensive steel industry has come under increased scrutiny. He Wenbo of Baosteel noted that meeting emission standards can cost up to 100 yuan per ton of steel, a burden that could push many struggling mills to the brink. Given the capital-intensive nature of the industry, a single mill's collapse can trigger a ripple effect, dragging down multiple banks. Banks have already started to take notice of these risks. A major state-owned steel group in the east recently received warning letters from leading banks, making it difficult to secure new loans. At one point, the company’s cash reserves were only enough to last 10 days, highlighting the precarious financial position of many steel firms. Industry experts agree that while systemic risks are manageable through coordinated efforts, localized problems remain a concern. Although steel mills typically provide collateral like land or equipment, these assets often lose value quickly, leading to bad debt for banks. Wu emphasized the need to closely monitor two types of steel companies: those with excessively high debt ratios and those engaged in overly ambitious diversification projects. Li Xinchuang of the China Iron and Steel Association sees some defaults as a natural part of the industry's evolution. He argues that such failures are necessary for the survival of the fittest and that the government should focus on supporting affected workers during the transition. He also pointed out that local authorities have a responsibility to ensure that approved projects are properly managed, which could help curb excessive investment in the sector.
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