2015 becomes worst year for sector as losses surge, says industry body
Chinese steel producers experienced the worst year in 2015, when the losses of major firms surged, as the industry faced mounting pressure from overcapacity problems and price drops, the top official of the country's main steel industry body said Thursday.
The troubled steelmakers may get a relief from new measures such as debt-to-equity swap program, but challenges will persist, experts noted.
Combined losses in the primary business of major steel producers increased twenty-four-fold from 2014 to over 100 billion yuan ($15.5 billion) in 2015, the Xinhua News Agency reported, citing Liu Zhenjiang, secretary-general of the China Iron and Steel Association, at an industry meeting in Changzhou, East China's Jiangsu Province on Thursday.
"The year 2015 was the worst year for the steel industry," said Liu, noting that major steel companies reported losses for 12 consecutive months.
"A sharp downturn, excess capacity and lower prices sent distress signals to some companies and posed tough challenges for our business in 2016," noted Liu.
Amid such challenges, some steelmakers are looking to new measures such as debt-to-equity swaps and overseas market expansion.
Debt-to-equity swaps
Sinosteel Corp, one of the largest State-owned steelmakers, has submitted its debt restructuring program to the State-owned Assets Supervision and Administration Commission and the China Banking Regulatory Commission for approval by the State Council, China's cabinet, the 21st Century Business Herald newspaper reported on Thursday.
This proposal incorporates agreements Sinosteel has reached with dozens of banks for debt-to-equity swaps, deleverage and debt renewal, according to the report. Under the proposed program, its debt will be reduced to about 60 billion yuan, of which debt-to-equity swaps will take up about a half, the report said.
Sinosteel couldn't be reached for comment by press time.
"The debt-to-equity swap program will convert nonperforming loans into stocks held by banks, which could significantly reduce debt for companies, including nonperforming 'zombie companies,'" Wang Guoqing, research director with the Beijing-based Lange Steel Information Research Center, told the Global Times Thursday.
Though the debt-to-equity swap program provides an opportunity for steel enterprises, it might also hinder efforts to cut overcapacity.
The prospect of zombie firms surviving with the help of debt-to-equity swaps will undermine the government's efforts to slash excess capacity, Wang said.
In addition to Sinosteel, other State-owned steel enterprises with heavy debts will also possibly resort to debt-to-equity swap program, including Tianjin-based Bohai Steel Group Co and Dalian-based Dongbei Special Steel Group Co, according to Wang.
However, although the debt-to-equity swap program has gained much attention in recent weeks, there is no official document to support it, Wang said.
Overseas market expansion
Another solution domestic steel producers are looking at is expanding to the overseas market, with the latest example being Hebei Iron & Steel Group (HBIS), which offered to acquire a loss-making steel mill in Serbia.
HBIS announced a bid of 46 million euros ($52.2 million) for a Serbian steel enterprise and pledged to invest $300 million in expanding production, said Serbia's Economy Ministry Tuesday.
The move to acquire a loss-making steel mill amid overcapacity issues at home is "a measure to expand to the overseas market and to reduce reliance on the domestic market, as the government of North China's Hebei Province has announced that it will reduce half the capacity within five years", Wu Chenhui, an independent researcher, told the Global Times on Thursday.
