Steel mills caught in credit squeeze

Chinese steel companies, the world's largest, helped drive a regional industry benchmark index to a seven-month low as concern builds that some mills face financial difficulty amid a government credit squeeze.

"They are having trouble accessing finance," said Yunde Li, chairman of Ishine, a unit of China Zhongsheng Resources, which processes iron ore in Shandong. Some of Ishine's steel mill customers could not make their payments to his firm, Li said.

Closely held steel mills in China are struggling to get funding and that has led to panic selling of iron ore, according to Morgan Stanley. The mainland's top banking regulator said this week strict credit guidelines would be imposed on mills that were big polluters and users of energy.

"The capital squeeze on steel traders has started to affect mills," said Henry Liu, Hong Kong-based executive director of China Merchants Capital and head of its commodities research department. "It looks like the credit crunch is worsening."

Iron ore this week had its biggest drop in more than four years, spooked by the credit squeeze and a surge in stockpiles.

"There are talks some mills are facing tightening credit, as they may be charged with higher interest rates on loans," said Hu Shunliang, investor affair representative with Maanshan Iron & Steel. It had not affected Maanshan, the second-largest listed steelmaker in Hong Kong, he said.