Shanxi Taigang Stainless Steel Co, China's biggest stainless steel producer by output and market share, announced Saturday that it will launch its third round of annual fundraising soon, making it the latest domestic steel maker to turn to the market for credit as mills across the country see their profits crumble, a trend which experts warn may threaten the development of the industry.
According to Taigang's recent earnings report, the company's profits sank to 365.6 million yuan ($57.53 million) in the first half of 2012, down 56.39 percent from the same time last year.
Meanwhile, it plans to sell 9 billion yuan worth of short-term bills and raise 3.16 billion yuan through public placement. The company has already raised 5 billion yuan from bond issuances in April and August.
In recent months, a growing number of companies in the industry have moved to expand their financing plans. For instance, on August 20, Wuhan Iron and Steel (Group) Corp said it would issue 6 billion yuan in medium-term notes, three times more than the 2 billion yuan it initially hoped to raise.
Collectively, Chinese steel firms have raised a total of 93.76 billion yuan this year as of August 7, well above the 89.55 billion yuan raised by the industry during the whole of 2010, according to mysteel.com, an industry portal.
The large surge in fundraising activity is mainly due to the cash flow squeeze many steel makers are feeling now as falling steel prices eat away at their profits, Zhao Xiang'e, a steel analyst from Everbright Securities, told the Global Times.
Across China, steel makers are on average earning just 1.68 yuan in profit for each ton of steel they sell, Wang Xiaoqi, vice director of the China Iron and Steel Association (CISA), said at a summit Thursday. Wang also revealed that 83 percent of China's steel firms have suffered a loss at some point this year.
With demand for steel in the downstream market unlikely to rebound in the near future, more firms will likely begin pushing forward with more fundraising activity soon, Zhao said.
However, such intensive financing, in the face of what could be a prolonged industry downturn, may add insult to injury for these firms by saddling them with huge debt burdens, a steel analyst, who prefers to remain nameless, told the Global Times.
"It is not a wise idea for steel companies to expand their debts currently, except when the money is used to pay back high-interest debts or to produce special types of steel products required by the market," the analyst said.
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