Posted on 30 Jan 2017
Steel firms are advised to carefully analyse their cash conversion cycle and indebtedness level to prevent defaults that could damage the reputation of the Thai steel industry, says the SCB Economic Intelligence Centre (EIC).
The recent 806-million-baht debt default of SET-listed Rich Asia Corporation Plc (RICH), a maker and distributor of steel pipes, has led the company to seek talks with its creditors and restructure its finances.
RICH also has bills of exchange (B/Es) worth 105 million baht owed to five small investors that are due between February and April for which the company has not yet provided a plan to repay.
Although this case is viewed as an outlier amid the strong liquidity of the overall Thai steel industry, the EIC advises all Thai steel companies should be careful about incurring debt in order to maintain secure financial statuses, especially as the Thai steel sector needs to compete with cheap Chinese steel that is being dumped into the Thai market.
Most Thai steelmakers are encouraged to upgrade their machinery to use more advanced production technologies in order to increase their competitive advantage and gain economies of scale to compete with other steelmakers, particularly those in China.
The EIC said RICH's debt default was caused by the company's lack of liquidity, compounded by a high debt to equity ratio (D/E ratio) of 2.5. The average D/E ratio of the Thai steel industry is around 1.3.
The EIC suggests Thai steelmakers manage their cash conversion cycles by making their inventories more efficient to prevent concentrating funds in stocks, which have low liquidity.
The company should order raw materials to match new orders to avoid stocking up on inventory, which leads to rising costs.
Thai steelmakers should compared their D/E ratio to other companies in the same field in order to evaluate whether their debts are repayable.
"At this stage, we see the debt default of a Thai steelmaker as an individual case that does not reflect the entire Thai steel industry," the EIC said in a report.
