Half-year re­ports re­veal risks for steel com­pa­nies

Fi­nan­cial prob­lems may lead to a broad ‘domino ef­fect’ that could un­der­mine en­tire sec­tor: Ex­pert

China Daily (Hong Kong) - - BUSINESS / DIGEST - By WEI TIAN weitian@chi­nadaily.com.cn

The half- year re­ports of ma­jor steel com­pa­nies showed signs of im­proved per­for­mances, but hid­den fi­nan­cial risks and dis­or­dered com­pe­ti­tion con­tinue to add pres­sure to the sec­tor, which is bear­ing the brunt of China’s eco­nomic slow­down. Among the 18 listed steel com­pa­nies that had re­leased their mid-year re­ports by Mon­day, 11 re­ported prof­its, while seven re­ported losses. Mean­while, com­pa­nies in the red are see­ing smaller ranges of losses.

For in­stance, the Liaon­ing-based Lingyuan Iron & Steel Co saw its net profit ris­ing by 116 per­cent year-on-year to 37 mil­lion yuan ($6.04 mil­lion), while Guang­dong Shaoguan Iron & Steel a unit of Baos­teel Group, China’s largest steel com­pany

re­ported a 101 per­cent in­crease in net profit.

Ma­gang ( Group) Hold­ing Co, which re­ported the largest loss in the iron and steel sec­tor last year, re­duced its losses by more than 80 per­cent year-on-year, from 3.3 bil­lion yuan to 1.89 bil­lion yuan. Anyang Iron & Steel Co also man­aged to re­duce its losses by nearly 60 per­cent.

But an­a­lysts still see risks in the half-year re­ports de­spite the im­prove­ments, be­cause a large amount of the prof­its re­ported in the first half came from govern­ment sup­port and amend­ments to fi­nan­cial state­ments.

Of the to­tal 2.97 bil­lion yuan in net prof­its re­ported by the 18 steel com­pa­nies, 611 mil­lion yuan, or more than one-fifth, were be­cause of the fi­nan­cial sup­port from lo­cal gov­ern­ments.

An ob­vi­ous case was Lingyuan Iron & Steel Co, which re­ceived 388 mil­lion yuan in govern­ment sup­port dur­ing the pe­riod the half-year re­port cov­ers. If that sup­port is ex­cluded, it would have re­ported 253 mil­lion yuan in losses.

Mean­while, the com­pany has also made changes to its ac­count­ing poli­cies to ex­tend the as­set de­pre­ci­a­tion sched­ule, which re­sulted in 90 mil­lion yuan less de­pre­cia­ble costs in 2013, and 67.5 mil­lion yuan more in net profit.

Sim­i­lar mea­sures were also adopted by other steel com­pa­nies, such as Shaoguan Steel.

Due to the over­all de­pres­sion in the steel sec­tor, the fi­nan­cial risks of th­ese ma­jor com­pa­nies are still on the rise. The com­bined ac­counts re­ceiv­able for the 18 com­pa­nies were 19.8 bil­lion yuan, among which Baos­teel re­ported 10.8 bil­lion yuan not yet cred­ited into its ac­counts.

Yet, only 422 mil­lion yuan were set aside by th­ese com­pa­nies for pos­si­ble bad debts, while Lingyuan and Ma­gang made no pro­vi­sions.

Li Xinchuang, deputy sec­re­tary of the China Iron and Steel As­so­ci­a­tion, warned that steel com­pa­nies may face cash from prob­lems in less than a year, which could have a domino ef­fect and knock down the en­tire sec­tor.

By the end of June, the 86 large steel en­ter­prises na­tion­wide had more than 3 tril­lion yuan in debt, in­clud­ing 1.3 tril­lion yuan in bank loans, ac­cord­ing to the CISA. The debt-to-as­set ra­tio was nearly 70 per­cent.

Most steel com­pa­nies are still strug­gling amid de­creas­ing profit mar­gins in the sec­tor due to slug­gish de­mand and over­ca­pac­ity. Ac­cord­ing to the CISA, the aver­age sales profit mar­gin of its mem­bers was just 0.13 per­cent in the first half, the low­est level in China’s in­dus­trial sec­tor. More than 40 per­cent of com­pa­nies re­ported losses, 3.79 per­cent more than a year be­fore.

The price of im­ported iron ore has in­creased by about 30 per­cent since the end of May, while prices at the end of the man­u­fac­tur­ing chain only rose less than 10 per­cent.

Liu Yongchang, an ex­pert with the Me­tal­lur­gi­cal Cham­ber of Com­merce, who used to be the di­rec­tor of the steel depart­ment at the for­mer Min­istry of Me­tal­lur­gi­cal In­dus­try, said that China’s steel mar­ket re­mains the most ac­tive in the world, but mis­guided poli­cies have damp­ened the healthy de­vel­op­ment of the sec­tor.

“Over­ca­pac­ity is just an ap­par­ent cause for the sec­tor’s losses, the real rea­son is that the mar­ket is dom­i­nated by prod­ucts sell­ing at a loss, which de­struc­ted the price trans­mis­sion sys­tem to down­stream sec­tors.”

He sug­gested that the govern­ment should stop in­ter­ven­ing and let the mar­ket play its role, so that the com­pa­nies in the red could face their “judg­ment by the mar­ket”.

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