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Chinese Steel Makers in Trouble

Chinese Steel Makers in TroubleChinese Steel Makers in Trouble

Chinese steel companies saw their debts approach alarming levels in the January-June period, with steelmakers having filed their half-year results to stock exchanges by the end of August.

Eighteen Chinese steelmakers posted a debt-to-asset ratio higher than 70 percent, with Xinjiang-based Bayi Iron & Steel Co., Ltd. burdened with the highest debt ratio at 86.46 percent, according to their financial statements, Xinhua reported.

Sitting on the highest debt-to-asset ratio, Bayi attributed its loss of 719 million Yuan in the first half of the year to weaker demand from the property and infrastructure construction sectors.

China currently has 86 steel companies with their total amount of production amounting to 411.91 million tons of crude steel, 362.02 million tons of pig iron and 552.25 million tons of rolled steel products in the first half of the year, according to China Iron and Steel Association (CISA).

Debt to Rise

Zhang Lin, an analyst at lgmi.com news portal expected the debt problem to aggravate for steel companies as the sector tends to make substantial investments that usually takes a very long period to mature.

Even for the best performing steel companies, the debt-to-asset ratio remained above 60 percent; a level Zhang said underlines the hardship of the entire sector.

Total debts of the Chinese steel sector exceeded 3 trillion Yuan ($486b) by the end of June, and 43 percent of the total debts, or 1.3 trillion Yuan, stemmed from bank loans, the CISA data showed.

"Chinese steelmakers expanded too fast over the past few years but such expansion is mainly driven by mounting debts borrowed from banks and other financing channels," said Xu Xiangchun, a steel analyst for Mysteel.com, a steel market portal.

As steel makers' debt piles up, banks become more reluctant to make loans to the sector due to the high debt-to-asset ratio. The China International Steel Congress last month estimated the country's steel industry to have an excess of 180 to 240 million tons of steel.

In the January-June period, Chinese steel companies posted a combined profit of 2.27 billion Yuan, reversing a loss of 2.33 billion Yuan in the first quarter, according to the CISA data.

But the profit is brought by 4.32 billion Yuan in investment revenues and 3.88 billion in non-operating income, rather than their loss-incurring core steelmaking business.

Financialtribune.com