News / Economy

Troubled Chinese Steelmakers Lose Lifeline of Cheap Credit

A man walks inside the Xinming Steel Pipe Plant in Tangshan, Hebei province, China, July 11, 2014.
A man walks inside the Xinming Steel Pipe Plant in Tangshan, Hebei province, China, July 11, 2014.

In Tangshan, a polluted industrial Chinese city that produces more steel a year than the entire United States, the Xinming Steel Pipe Plant shut earlier this month leaving more than 400 workers and a host of creditors unpaid.

The turmoil at the firm shows how huge overcapacity is pushing scores of similar steel enterprises to the brink of bankruptcy. Unlike in the past, however, provincial governments are now unwilling or unable to bail them out.

In a bid to rebalance the world's second-biggest economy, Beijing is dismantling a local government support structure that has given steel firms a lifeline of cheap credit, lucrative construction contracts and preferential tax rates.

This support has saddled the steel industry with huge debts and at least 200 million tons of excess production capacity -- far more than either U.S. output of 87 million tons or the European Union's 166 million tons.

China is estimated to have a steel production capacity of more than 1 billion tons.

Low-end steel

Tangshan, just east of Beijing in Hebei province, produces 100 million tons of mostly low-end steel used in construction every year and has been at the center of a campaign aimed at closing obsolete and polluting steel works.

After a devastating 1976 earthquake killed at least 250,000 people and leveled much of the city, Tangshan was given free rein to use steel to rebuild its shattered economy.

But it is now feeling the heat from Beijing's efforts to control this type of chaotic credit-fuelled growth in the world's second-biggest economy.

China has also launched a “war on pollution” to impose tough standards and targets on the steel sector and promised that the market will play a decisive role in tackling the glut.

With cash-strapped regional authorities now less able to offer support, hit by credit restrictions and falling government revenue from bloated sectors such as steel, they have been stepping in only to ease some of the strife brought about by unpaid wages and mass layoffs.

At the Xinming Steel Pipe plant, a bulldozer was parked at the entrance to prevent anyone driving in and stealing what remained of stock and equipment. The plant appeared deserted during a recent visit by Reuters apart from two security guards standing in the distance.

The firm owes around 10 million yuan ($1.61 million) in wages to more than 400 staff, as well as debts to various suppliers and creditors, according to documents seen by Reuters.

“The boss kept delaying our wages, saying next month will be fine, and then next month, and then he disappeared,” said a worker waiting outside the plant, who only gave his surname as Zhang. He was among a small group of workers outside the plant also who said they were trying to get their wages.

Calls made to phone numbers listed for the firm's chairman, Fu Baozhong, and other officials were not answered.

Bankruptcy likely

A manager at one of Xinming's creditors said that while the government was holding discussions with creditors to see whether the firm's debts could be rescheduled there was a prospect of bankruptcy proceedings being launched if there was no agreement

“This is just one example of many -- most firms have been trying to cling on until rivals disappeared and the market improved, but they can't all do so,” said the manager, who said his firm was owed “tens of millions of yuan”.

The manager, who did not want to be named due to the sensitivity of the situation, said if the administrative staff could not be reached it would make retrieving money harder.

The local governments of Tangshan, the steel district of Fengrun where Xinming is located and the provincial government all declined to comment.

With the banking sector under pressure from Beijing to rein in cheap credit, the sector is getting less money.

The All-China Chamber of Commerce for Small Metallurgical Enterprises estimates that credit given to the steel sector has fallen by around 140 billion yuan this year, about 10 percent of the total.

Unable to obtain bank loans, some firms have been forced to borrow from other steel companies at higher rates of interest. This puts them under even more pressure when other struggling mills call in their loans, risking a chain reaction.

16 mills closed

In Hebei, at least 16 mills have shut because they are unable to pay their bills, its governor Zhang Qingwei said in March, and the problems have spread to other areas of China.

Earlier in July, the semi-official China Business News reported that Xilin Iron and Steel Group in Heilongjiang province, was struggling with heavy debt and had not paid its workers for five months. Calls made to Xilin were unanswered.

Elsewhere, Highsee Steel in Shanxi province has also been shut for three months, with official media reporting that a rescue package was unlikely.

“It's not that local governments don't support us - they just can't. They have no money and are under big pressure,” said a private mill official in Tangshan.

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