Energy & Resources

Steely approach

Sha Steel to take over debt-ridden state rival

Shen Wenrong

Shen Wenrong: rescue bid

The timing could hardly have been worse. Just days before it was due to begin trade and investment talks with the US as part of the two countries’ newly-formed Comprehensive Economic Dialogue, Beijing announced record steel production occurred in June.

Government figures show that the country produced 73.23 million metric tonnes of steel last month, up 5.7% year-on-year. Figures for the first six months of the year, also reveal a 4.6% jump to 419.75 million tonnes.

The good news for China is that the additional capacity is being absorbed at home where construction is rebounding and inventories have stopped rising. Other government figures show that exports declined 28%, or 16 million tonnes, during the first half of the year.

However, this inconvenient truth did not deter US President Donald Trump, when he told reporters last week that China has been, “dumping steel and destroying our industry. They’ve been doing it for decades and I’m stopping it. It’ll stop. There are two ways: quotas or tariffs. Maybe I’ll do both.”

Analysts believe that China’s steel industry is facing a cyclical problem. The government’s programme of cutting excess capacity has paradoxically encouraged marginal steel mills to fire up production again to fill the supply shortage, potentially generating a new cycle of overcapacity.

Nevertheless, investors remain enthused by the sector’s renewed profitability, with the stock prices of China’s biggest producers such as Angang Steel and Maanshan Iron and Steel rising 30% to 70% respectively so far this year.

The government has a target to cut 100 million to 150 million tonnes of steel production for 2017. It has announced the removal of 42 million tonnes of capacity during the first five months of the year. In addition, it has also eradicated about 120 million tonnes of what it classifies as illegal capacity – known as detiaogang (steel forged from scrap rather than iron ore).

However, analysts also point out that some of the capacity which has left the industry was already idle. And the ongoing saga surrounding Dongbei Special Steel demonstrates just how difficult a job the central government has on its hands in rustbelt provinces like Liaoning, which fear the social consequences of massive job losses.

Last week, the provincial government announced that it had come up with a new restructuring plan for Dongbei, which became the first local government owned entity to default on its bonds in March 2016. After eight more defaults since then, and having run up total debts of Rmb70 billion ($10.4 billion), the company was placed into bankruptcy by a Dalian court last October.

But the Liaoning government has done everything it can to keep the steel company in operation. In fact, Dongbei’s mills have maintained normal operations throughout the restructuring process.

A year ago, the company also tried to latch onto the central government’s newly formulated policy involving debt-for-equity swaps. As we reported in WiC319, its first restructuring plan proposed swapping 70% of Dongbei’s debt, with the remaining 30% to be paid off with fresh loans from creditors. Bondholders rejected it because they did not want a stake in an unlisted company. They also complained the government was putting political interests ahead of investor concerns.

More recently there were rumours that state-owned Angang Steel would act as a white knight, taking a 51% stake.

But the company’s latest saviour has turned out to be China’s “steel tsar” as the Economic Observer dubs Shen Wenrong, owner of Sha Steel, which runs the country’s largest individual mill (see WiC31 for his background).

The newspaper says it is not yet clear what stake Shen’s Jiangsu-based company will take in Dongbei, but its participation has been confirmed as part of a new restructuring plan put forward. A local state firm, Benxi Steel, will also take a 10% stake in return for an Rmb1 billion payment. That said, WiC expects this won’t be the last we’ll be hearing of Dongbei Special Steel’s very special problems…

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