Banks call in loans to troubled steel sector

China's steel industry will face higher financial risks in the second quarter in addition to its existing bad debts, experts say.

The credit woes in steel production are likely to bring funding risks in iron ore trading, according to Beijing-based Lange Steel Information Research Center.

Xu Liying, of the research center, said financial risks have extended from steel trading to such commodities as iron ore because of the tight liquidity of domestic steel companies.

Zhao Xizi, chairman of the All-China Chamber of Commerce for Small and Medium-Sized Metallurgical Enterprises, said at an industrial forum earlier this month that banks have started to ask steel companies to pay back loans before their due date is up.

He said banks will require at least 140 billion yuan ($22.5 billion) of debt to be paid back by the steel companies ahead of schedule.

Due to overcapacity and ongoing losses, many steel mills chose to keep production simply in order to keep banks from asking them to repay their loans.

Industrial analysts said domestic steel companies have an average debt ratio of more than 70 percent and that banks asking for loans to be paid back ahead of schedule is driven by policies rather than shortage of cash.

According to Lange Steel, China's real estate sector will continue to drop in the second quarter, as manufacturing struggles to stay afloat.

The golden age of large-scale infrastructure construction guided by the central government is over.

"All those factors will lead to less demand in steel's downstream markets," Lange reported. "Listed steel companies' profitability is expected to stay low in the second quarter."

In the first quarter, 15 of 35 listed steel companies in China reported deficits.

Lange Steel said weak demand and rising inventories have worsened the companies' cash flow. And such financial reasons as "bad debts and higher loan rates" will also affect cash flow, the report said.

Zhang Changfu, vice-chairman of the China Iron and Steel Association, said during an earlier news conference that banks have put the steel sector on a list of high-risk industries that will find it hard to get loans.

Nevertheless, China's crude steel output still increased in the first three months, up 2.37 percent year-on-year, to 202.7 million metric tons.

dujuan@chinadaily.com.cn