Stricken China steel mills look to state to ease exit strategy

23 March 2015

Many loss-making Chinese steel mills could finally be ready to shut their doors this year, with the government expected to offer more incentives for stricken enterprises to close as the economy slows and a war on smog intensifies.

For years, hundreds of poorly-regulated mills dodged policies aimed at solving the perennial problems of pollution and overcapacity, protected by surging demand and the reluctance of local authorities to jeopardize growth and employment.

But tougher environmental enforcement and a slowdown in demand have now mired the sector in losses, leaving firms struggling to pay wages or upgrade technology. The head of a state-owned mill said this month that 2015 could end up being the sector's worst year yet.

From last year, regulators promised to give the market a bigger say in deciding which mills would close, but many have clung on longer than expected in the hope that rivals perish first, propped up by local authorities terrified by the prospect of unemployment and unrest.

With excess capacity now said to stand at about 300 million tonnes and prices drifting near 20-year lows, the industry is waiting for Beijing to step in again with decisive measures aimed to close failing steel firms for good.

"The central government may have to find a way to deal with it, but eventually the bottom line is they have to close down those steel mills," said Helen Lau, analyst at Argonaut Securities in Hong Kong.

Fears of a widespread shutdown of Chinese mills that could cut the country's demand for iron ore sent prices of the raw material last week to the lowest since records began in 2008.


Under a revised restructuring plan the government will improve "exit mechanisms" for the sector, allowing enterprises already facing losses to find a way out, according to a draft published by the Ministry of Industry and Information Technology.

Cao Huiquan, chairman of Hunan Valin Iron and Steel Group, told Reuters last week that local governments still propped up loss-making firms to save jobs and prevent expensive investments from being devalued.

"The exit threshold in the sector is high, capital injections are high and firms have spent huge amounts," he said. "And then we have the employment problem, which needs to be resolved through government spending."

While there are already procedures in place to help liquidate plants, bankruptcies have been rare, with local authorities reluctant to handle rising unemployment and preferring lenders to restructure debts, banking sources say.

"local governments will not let their companies go bankrupt, they will push banks to restructure loans," said a loan officer at the headquarters of one of the top five Chinese banks.

In Hebei, a major steelmaking province close to Beijing, growth slipped to 6.5 percent last year, one of the lowest rates in the country. Local officials estimate that as many as 400,000 workers will need new jobs once planned mill closures are complete.

But it appears to be winning a campaign for more state support, with Premier Li Keqiang telling a Hebei delegation this month that the province should be offered preferential policies and financing.

"The restructuring of Hebei's steel industry has been far harder than expected and we need the state to come out with a series of measures to support our transformation," said Zhang Qingwei, Hebei's governor.


Since China launched its "war on pollution" last year, mills have faced tougher standards, with executives even risking imprisonment if they fail to comply.

A crackdown on the city of Linyi in Shandong led to the closure of several mills, and a new round of inspections in Hebei could force more plants to rectify or die.

Larger steel firms have expressed hope that tougher environmental legislation will create a level playing field, but many firms have had little option but to keep running polluting equipment.

The hope has been that local governments will either pay for their upgrades or compensate them for closing down.

"Private mills have no money to revamp their environmental equipment. They are still making losses and they can't get money," said Xu Zhongbo, head of Beijing Metal Consulting, which advises steel mills. "They will use their existing equipment and try to continue producing and just see what happens."