Liquidity crisis hits mainland steel traders

PUBLISHED : Tuesday, 07 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 11:08pm

Share

A liquidity crisis has erupted in the mainland's steel trading industry, with about 20 cash-strapped steel trading firms sued by their creditor banks for missing loan repayment deadlines, according to state media.

Banks including China Minsheng Bank and China Everbright Bank have in recent days filed lawsuits against the traders. Some have also been accused of misusing the loans meant for the steel trade on investment in properties and shares, the Securities Times reported, citing unnamed industry insiders.

The incident has sent shock waves through the industry because many mainland traders have cross-guaranteed loan repayments to boost their credit worthiness - meaning one trading firm's troubles spread quickly to others.

'Unlike in Western nations, the mainland steel market is characterised by the existence of a large number of middlemen,' said South Korean brokerage Mirae Asset Securities' head of commodities research Henry Liu Xiaoning.

'Given the traders' liquidity woes, their ability to carry more inventories and hence demand for steel will be squeezed for a while.'

Tight liquidity has forced some traders to sell inventory to raise cash, thus exacerbating the pace of decline in steel product prices, which have already been pressured by industry overcapacity, high inventory levels and weak demand.

According to a Barclays research report, the prices of four kinds of steel products traded in Shanghai fell 15 per cent to 23.5 per cent late last month from a year ago. Steel inventories have risen 11.7 per cent in the same time.

The mainland's crude steel output may fall 0.7 per cent this year, the first decline in 31 years, due to weak demand, according to a report by Xue Heping, a senior industry analyst at Steelinfo consultancy. His report was carried by the website of the China Iron and Steel Association, which represents the nation's steel mills.

Although his view was not shared by other analysts - including Liu and Mysteel chief analyst Xu Xiangchun, who both predicted a 2 per cent increase in output for the year on the back of higher demand from Beijing's fast-tracking of infrastructure projects - all three agreed that the country's steel demand had entered a slow-growth stage.

It comes after a decade of double-digit percentage growth, with the exception of 2008 during the global financial crisis.

The mainland's steel output, which generally closely tracks consumption since imports and exports are relatively small, has grown 11.4 per cent to 24.9 per cent annually between 2001 and 2010, except for a dip to 2.4 per cent in 2008. Growth slowed to 7.3 per cent last year.

A decline in steel output has great implications for suppliers of raw materials used in steel smelting, such as iron ore and coking coal, much of which is imported from nations like Australia, Brazil and Mongolia.

The price of benchmark iron ore with 62 per cent iron content fell 7 per cent last week to a 30-month low of US$115.2 a tonne, Reuters reported.

Declines in new-home construction and home appliance production due to Beijing's tightening measures, slower growth in carmaking and shipbuilding, and a sharp decline in the production of railway cars have all played a part in stalling steel demand growth.

7.3%

Growth in steel output slowed to this much last year after annual rates of 11.4 to 24.9 per cent between 2001 and 2010 (except for 2008)