Riches to rags?

By Wang Xinyuan Source:Global Times Published: 2014-3-30 22:03:01

An employee works in a steel plant. Photo: CFP

The largest private steelmaker in North China's Shanxi Province is reportedly on the verge of bankruptcy, while overcapacity and sluggish demand continue to plague the whole industry.

Established in 1987, Highsee Group is the largest private steel manufacturer in Shanxi in terms of output, boasting annual production of 6 million tons of steel. But it now has debts of at least 3 billion yuan ($484 million), according to recent media reports.

Its main creditor is China Min­sheng Banking Corp, to which it owes 1.95 billion yuan.

Five of the group's six furnaces have halted production, Beijing-based Securities Times reported Wednesday.

Core business neglected

Media reports have attributed Highsee's difficulties partly to Chairman Li Zhaohui, who has focused on diversification and investment in the stock market rather than on the core business of steel manufacturing.

Li, 33, was ranked the richest man in Shanxi in 2008, with a fortune inherited from his father, Li Haicang, a rags-to-riches businessman who started the company.

Li Zhaohui is known as a prominent member of the fuerdai (second-generation rich), who hit the headlines when he divorced movie star Che Xiao in 2012. He was forced to terminate his studies in Australia in 2003 after his father's death, and returned home to take over the family business.

Since Li took over the business, he has invested in banks, securities firms and listed companies including Minsheng Banking Corp, Industrial Bank Co, and Aluminum Corporation of China.

In 2004, Li became the 10th largest shareholder in Minsheng by buying 160 million of its shares for 590 million yuan. He sold about 100 million shares for 1 billion yuan in 2007 when the A-share market reached a record high, and before its collapse amid the financial crisis in 2008.

Li could not be reached for comment by the Global Times.

Struggling industry

The situation Highsee finds itself in is a picture of the overall steel sector, Wang Guoqing, an analyst at Beijing Lange Steel Information Research Center, told the Global Times on Wednesday.

Highsee, just like many others in the sector, tried to diversify, Wang said.

However, this required investment and weighed heavily on the company's cash flow, which had already tightened amid the cooling economy and industrial overcapacity, Wang said.

The steel industry has been increasingly plagued by the overcapa­city issue in recent years, especially as prices have been slumping and weak demand has hit cash flow. Currently, rebar sells for about 3,300 to 3,500 yuan per ton, nearly half the price in 2009 when China launched a 4-trillion-yuan stimulus program to ward off the effects of the global financial crisis, Wang noted.

China produced 1.07 billion tons of steel products in 2013, even though there was only sufficient demand for about 800 million tons, according to official data.

Despite some good news for the sector, such as plans to boost urbanization and develop metropolitan clusters, steel prices have not picked up as much as hoped, Wang said.

In times of oversupply, steel producers compete against each other not only in terms of prices, but also quality, technology and even business models, Wang said, noting that Highsee's equipment and technology had not been properly upgraded, making it less competitive.

Even though prices of raw materials such as coal and iron ore have dipped compared with four years ago, the cost of labor and financing has risen, so many steel producers make only meager profits, and some are suffering losses, Wang noted.

By the end of 2013, the debt-to-asset ratio among major steelmakers had reached nearly 70 percent, while their profit margin was only 0.48 percent, or 28 yuan for a ton of steel, according to the China Iron and Steel Association (CISA).

Meanwhile, in response to the government's call to address the overcapacity issue, banks have cut financial support and tightened bank loans for sectors including glass, cement and steel.

Banks are also charging higher interest, amid concerns about soaring bad debts in these sectors.

China CITIC Bank Corp said its bad debts jumped between 2011 and 2013, mainly because of nonperforming loans in the steel industry, Shanghai Securities News reported on February 7 this year, citing the bank's president Zhu Xiaohuang. The lender said in December that it planned to write off 5.2 billion yuan of bad debt for 2013, up from an original estimate of 2 billion yuan.

Xiao Jiashou, a well-known steel trader in Shanghai, had his assets frozen in February as Minsheng and other lenders including Ping An Bank and Industrial and Commercial Bank of China (ICBC) were suing him for money owed, according to media reports.

How much does it owe?

Several potential buyers have shown interest in Highsee, including Hebei Jingye Group and Delong Steel Ltd, according to media reports.

Hebei-based Delong is in negotiations to take over Highsee, China Business News (CBN) reported Wednesday. But Ding Liguo, chairman of Delong, declined to comment, the newspaper said.

Taiyuan Iron and Steel Group Co, a leading steelmaker in Shanxi, is also reported to have made a bid for Highsee, but the bid failed as agreement on price could not be reached by both parties, CBN reported.

One major obstacle to takeover bids is the uncertainty over exactly how much the company is indebted. As well as the money it owes to Minsheng, Highsee has also borrowed from other banks, including ICBC.

Minsheng said that debts unpaid from Highsee amounted to 1.95 billion yuan, Shanghai-based stock information provider reported on March 21.

An ICBC press officer declined to specify the amount overdue by Highsee, but told the Global Times on Thursday that it is not as much as the steelmaker owes to Minsheng. 

Consolidation in the steel industry is inevitable, Qu Xiuli, deputy secretary-general of the CISA, told the Global Times on Thursday, noting that more mergers and acquisitions will be seen in the future.

Smaller or underperforming steel mills will be acquired by more competitive firms, she said.

In the US, Japan and South Korea, the top two or three market players account for over 60 percent of steel production, but China's top 10 steel mills only accounted for 39 percent of the country's output in 2013, far less the target of 60 percent by 2015 set by the industry's 12th Five-Year Plan (2011-15), said Wang of Beijing Lange.

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