Blast off

Time to unwind? Highsee’s financials look bleak

Li Zhaohui is no stranger to life challenges. His father Li Haicang – aka ‘the Shanxi Steel King’ – was assassinated when he was a mere 22. As a result of this shocking episode, Li dropped out of Australia’s Monash University to run the family’s business empire. “I did not feel I had the ability,” he later told Southern Weekend. “But I had to bear the responsibility.”

A little over a decade after Li inherited his father’s steel mills, he faces a dire situation. In fact, the young tycoon isn’t the only one that’s questioning his commercial ability. His firm’s flagging financials have become a hot topic for bankers and the media too.

Anxiety has grown that his biggest foundry has closed, meaning the company won’t be able to service its bank loans.

In the absence of any comments from Li himself, CBN took matters into its own hands with some onsite investigating. On the morning of March 22, it snuck one of its reporters past the threadbare security at Li’s main steel complex. It was largely empty and ghostly silent. One of the few employees present told the journalist that all six blast furnaces had been shut down and the plant was out of iron ore. In its heyday, the foundry was taking delivery of 36 wagons a day of ore from Australia, via Qingdao. Insiders told CBN that no shipments had arrived at all in January or February.

Highsee Iron and Steel (it changed its name from Haixin last May) was built by Li’s father into Shanxi’s biggest private steel enterprise, capable of turning out 6 million tonnes of steel products annually. It employs 10,000 people and serves as a vital part of the local economy in Wenxi County, where it is based. Not surprisingly, local officials are reported to be extremely agitated that the plant has stopped production.

Why has it shut down? The explanation is simple enough: an unravelling of its debts. A local bank regulator said that Highsee was hit by a liquidity crunch when one bank withdrew its loan, and others said financing was no longer a consideration. As other banks panicked and rushed in for repayment, the steel mill could no longer pay for more iron ore. Century Weekly says there are no exact figures for the amount that Highsee owes, but an industry estimate puts it between Rmb15 billion and Rmb20 billion ($3.22 billion). The biggest creditor could well be Minsheng Bank, but ICBC and China Construction Bank are also major lenders. (In one of its better decisions, Agricultural Bank of China halted loans to Highsee two years ago.)

Highsee started having trouble raising finance from banks late last year, when the local regulator specifically warned of the credit risk it posed. What has now occurred is exactly the sort of situation WiC referred to in our Talking Point in issue 208 (‘In a precarious state’) . Back then we warned that failing steel mills would mean a surge in bad loans at the major banks.

What makes a potential Highsee bankruptcy more worrying is that it won’t just be the banks that are drawn into the mess. CBN quotes a senior official at another steel mill who says the Shanxi steelmaker also borrowed “astronomical” amounts from the shadow banking sector. “If the government doesn’t come forward, Highsee may collapse,” he says, predicting ripple effects in the regional economy. The firm has hundreds of unpaid suppliers too.

A manager with steel giant Shougang told China Enterprise News that Highsee’s experience is not an isolated event, but is more likely to be the first of many such incidents. (Banks are increasingly worried: by the end of last year their exposure to steel firms was Rmb1.5 trillion and bad loans are already on the increase. In their latest results, the big five banks reported that total write-offs in 2013 were Rmb59 billion, up 127% versus 2012, according to the Financial Times.)

Financial strain in the steel industry continue to mount too. The sector’s trade body reckons losses reached a collective Rmb3 billion in the opening two months of 2014 and the quarter as a whole was the worst of the current century.

In the context of an industry with chronic oversupply and elusive profits, was the young Li Zhaohui just caught in the perfect storm? Indisputably he found himself in the wrong industry at the wrong time. But insiders at Highsee told Century Weekly that he deserves a fair portion of the blame too. Unlike his father he was never that interested by steel, and preferred diversifying into other industries like entertainment and finance. “If Li had not made such reckless investments, Highsee would not have wound up in such a terrible state,” one source told the magazine. Another observed: “Highsee’s troubles are not only the result of the broader industrial environment, but also because of the owner’s poor judgement.”

What’s next? The local government would like to see a rescue bid and officials are talking about Li’s uncle returning to the firm. He departed shortly after his nephew took control and later set up a cement and real estate business. He is said to have a stronger managerial record in steel and enjoys the confidence of Highsee executives.

But the returnee would also need to have the confidence of banks and persuade them to roll over their loans.

Yet even this might not be enough. According to Highsee’s suppliers there’s an additional hurdle: if production is to resume a fresh infusion of capital is required. They estimate Rmb1 billion will be needed to overhaul four of the blast furnaces and carry out maintenance work on the others.

To this end, some form of M&A looks necessary and late last month a team of executives from Hebei Jingye Group arrived to inspect Highsee’s plant. Based in Shijiazhuang, Jingye is a conglomerate that straddles chemicals, hotels and real estate. But it also has mills producing 10 million tonnes of steel a year. CBN reckons its might be interested in purchasing plant in other provinces because it faces regulatory constraints on expanding its capacity in Hebei.

But in the event that no rescue materialises, there will be mass redundancies. In addition to the social impact, billions of yuan in loans – official and unofficial – will need to be written off, much of it far beyond Wenxi’s borders.

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