A debt Blow?

By+Wang+Jun

State-owned steel magnate Sinosteel Corp. has been cast under a shadow of conflict and conjecture， a situation which many industrial insiders have attributed to the poor performance of the company.

Recently， some media outlets reported that Sinosteel was facing default of 78 billion yuan （$12.7 billion） on loans from nine banks， and the State-owned Assets Supervision and Administration Commission of the State Council（SASAC） was likely to inject 20 billion yuan （$3.26 billion） in order to resuscitate the company.

Sinosteel and some banks were quick to deny these reports. On September 23， Zhang Zhixiang， a spokesman for Sinosteel， told China Securities Journal that the reports are not accurate. The spokesman claimed the company is facing financial problems as a result of unpaid bills from customers， but denied rumors that the company is straining under the weight of overdue loans amounting to 10 billion yuan（$1.63 billion）.

Industrial and Commercial Bank of China（ICBC）， one of the major lenders to Sinosteel， also issued a statement， saying that Sinosteel and its subsidiaries had not defaulted on its loan. Sinosteels outstanding loans from ICBC accounted for less than 1.3 percent of the groups total financing raised from financial institutions.

Nonetheless， the market is fixated on discussing Sinosteel. “Although these are just rumors， they still reveal something about the performance of Sinosteel，” an anonymous securities analyst told International Financial News. “It is unfortunate for Sinosteel， because it has inevitably been affected by the recession of the steel market， and no one likes to see a recession. But as a state-owned enterprise （SOE） administered by the Central Government， it must have foresight and new strategic determination.

On September 30， China Chengxin International Credit Rating Co. Ltd. issued a report， rating Sinosteel at AA-， and revising the outlook on the long-term rating on Sinosteel from stable to negative. The rating company says the revision was made because recent negative media reports on Sinosteel may affect the financing environment for the company and have negative impacts on the companys liquidity.

persistent doubts

Ten years ago， it was inconceivable that a central SOE might be faced with the issue of its own survival. At the outset of 2008， the then-President of Sinosteel Huang Tianwen confidently made the claim that the company was likely to rank among the worlds top 500 companies that year.

He wasnt bluffing. In 2009， true to Huangs predictions， Sinosteel entered the elite club of the Fortune Global 500 for the first time， ranking 372nd. In 2011， it climbed to 354th place.

Following this short burst of glory， however， niggling concerns on the companys market situation have refused to subside， with the focus being most commonly placed on its high debt ratio. By the end of 2013， Sinosteel had total assets of 110.1 billion yuan （$17.93 billion）， while their debts amounted to 103.3 billion yuan （$16.82 billion）， leaving the company with a debt ratio of 93.87 percent.

“The debt ratio of a well performing company should not be very high， never surpassing 70-80 percent. If the debt ratio is higher than that， the company can still maintain good sales revenue， but this is not the situation in Sinosteel，” an anonymous deputy director of finance of a private company told International Financial News.

From 2010 to 2012， affected by the recession of the steel industry， Sinosteel suffered net losses for three consecutive years.

Even prior to 2008， the market was full of doubts on Sinosteel. At the end of that year， some media outlets reported that Sinosteel was forced to close the Channar iron project， a joint venture with Rio Tinto Group in Western Australia.

On December 12， 2008， Sinosteel issued a statement， emphasizing that Sinosteels Channar project was maintaining normal operations， and that Sinosteel and its subsidiaries were not suffering losses.

The latest round of loan default reports started from June this year， when a 690-millionyuan （$112.38 million） loan Sinosteel borrowed from China Development Bank became overdue， and loans from other banks were all extended. The loans are said to amount to 10 billion yuan in total.

“This to some extent indicates mismanagement on the companys behalf，” the abovementioned anonymous securities analyst told International Financial News. “Among the 113 SOEs under the SASAC， few enterprises except for Sinosteel and a small number of other enterprises have overdue loans.”

Why the default？

According to the companys website， Sinosteel is mainly engaged in the developing and processing of metallurgical mineral resources， the trading of metallurgical raw materials as well as products and associated logistics， related engineering technical services and equipment manufacture.

The anonymous securities analyst told International Financial News that the companys poor performance has its roots in some ill-advised decisions the company made in previous years. When the SASAC was established in 2003， there were more than 200 SOEs under its administration. Ever since， the commission has set about the task of reorganizing these central SOEs. Under this policy， Sinosteel commenced rapid business expansion after 2003， creating some new domestic companies and participating in some overseas projects， the Channar iron ore project with Rio Tinto being an example of such.

Some would maintain Sinosteel is now being forced to pay the piper for its decision to hastily expand before it was powerful enough. It was reported that Sinosteel entered into cooperation with privately owned Shanxi Zhongyu Steel Co.， and the latter at one point owed Sinosteel 4 billion yuan（$651.47 million） by the second half of 2010， catalyzing the financial black hole that the beleaguered enterprise now inhabits.

Zhang Lin， an analyst with Lange Steel Information Research Center， says Sinosteel has come a cropper in several big projects.“Purchase of steel companies in Shanxi Province and investment in iron ores of Midwest Corp. in Australia can all be considered missteps，” she said. In her opinion， what is more unfortunate is that the whole industry is in recession， further reducing the investment returns for these projects.

“Rash expansion is a major reason leading to the present difficulty. After the Chinese Government launched the 4-trillion-yuan （$586 billion） stimulus package in 2008， Sinosteel also embarked on runaway expansion of production capacity. It was very usual at that time that different subsidiaries of Sinosteel had overlapping businesses，” said yu Fenghui， an economist， in a commentary piece for The Beijing News. “In the meantime， its overseas expansion is also out of control， purchasing nearly 10 companies in Africa for iron ore and chromium resources. In 2008， Sinosteel acquired Midwest Corp. in Australia， but after that， prices for iron ore started declining， causing serious depreciation of this investment.”

Liu Haimin， Deputy Director of China Metallurgical Industry Planning and Research Institute， thinks that more deeply rooted reasons lie in deficiencies in the system of checks and balances governing central SOEs. “For the management teams of central SOEs， successful expansion projects represent their holy grail. If these projects are not successful， they wont have to bear the brunt of responsibility and the government will cover all losses. Therefore， the management teams often ignore risks and just uninhibitedly pursue expansion，” he said.

A report released by GF Securities Co. Ltd. warned that across the whole industry， there are risks of some traditional steel trading companies going bankrupt. “With a comparison between the financial data of Chinese and Japanese steel-trading companies among the world top 500 in 2012 and 2013 respectively， we can see that sales revenues of Chinese companies have similar sales revenues to those of Japanese companies， but their average debt ratio is 84 percent， which is 11 percentage points higher than their Japanese counterparts， and that the profit rate of Chinese companies is only 1-13 percent that of Japanese companies，”the report says.

yu thinks that it will be very difficult for Sinosteel， which is mainly engaged in resourcerelated businesses， to free itself from financial difficulties against the backdrop of the whole steel industry being in serious surplus capacity. Sinosteel will need a long time to recover. It is unlikely that steel companies and steel trading companies would recover from the recession soon， and there may be a serious crisis concerning non-performing loans.

In the aftermath of the default of Sinosteel， the government should be highly vigilant against the spreading of non-performing loans crisis across the whole steel industry and steel trading companies countrywide. “The supervising authority and commercial banks should be fully prepared for this crisis， and they must immediately start examining the quality of loans to the steel industry，” yu wrote.