Posted on 08 Oct 2015
China’s steel industry has entered a serious downturn, with steel trading firms being hit the hardest, according to the Guangzhou Daily.
China’s crude steel output during the first six months of the year dropped 1.3% to 409.97 million tonnes from a year earlier, the first decline in two decades, according to a steel trading company owner identified as “Li You.”
The country’s consumption of crude steel dropped 4.7% to 362.31 million tonnes, Li added.
Despite the Chinese government’s efforts to cap the growth of the steel production, Liu said, the lack of an exit mechanism in the market has led to a continued expansion of capacity since companies are not willing to cut production.
According to Li, rebar steel prices began tumbling in 2011 and the slower economic growth in China further dragged down demand, while the sector encountered added pressure as a result of an annual capacity of 1.1 billion tonnes and high inventory levels.
The total steel inventory in China is estimated at 1.1 billion tonnes, meaning the country has enough steel for the next five years, even without any new output, according to Li.
He said he had expected that demand for steel would have been boosted by a decision by several local governments to lift the restrictions on house purchases, but that has not happened and there are no signs of recovery.
Data from the China Iron and Steel Association showed that the steel industry is heavily in debt, with a debt-to-asset ratio of 69.98%, and steel trading companies have been the worst-hit, the newspaper said.
In the cities of Qingyuan and Shaoguan in the southern province of Guangdong, the number of steel trading companies has dropped from about 300 each to less than 100 in total, many of them forced out of business because of financial pressure, Li said.
Steel trading firms are being squeezed between producers and buyers, as they are required to pay their suppliers a month in advance while their clients’ payments do not come through until one to two months after delivery, according to Li.
This creates tight funding at steel trading firms, some of which turned to loan sharks for short-term funding but went out of business as their debt ballooned, Li said.
“Current steel prices are around the same level as 15 years ago, but borrowing costs and labor have become more expensive over that period,” he said.
