Iron & Steel Industry Faces Cash Flow Problems

SHANGHAI, Jun. 26 (SMM) -- Steel market has been sluggish recently, while Chinese commercial banks tighten financing loans for steel traders, causing cash flow problems of them to exacerbate. Cash flow shortfalls allowed steel traders to close and escape the market.

According to a Steelease survey of downstream steel industries, they also reported tight cash flows, with steel purchasing modest. Although China's central bank lowered deposit and loan interest rates, effective June 8th, cash flow problems did not ease.

The lack of liquidity at banks is the major factor leading to cash flow problems at the iron and steel industry. Interest rates of overnight and 7-day repurchasing both rose to a record high since late February on June 21st. That is mainly because the banking sector will be faced with seasonal capital audit at the end of June, which should lead to near-term cash flow tightness. Besides, the small fund outstanding for foreign exchange is also a contributing factor affecting liquidity at banks. Despite funds outstanding for foreign exchange grew in May, hot money still apparently flew out of China.

Besides, Steelease sources report that steel traders are the major borrower of most commercial banks, and banks fears deepened as some steel traders went bankrupt and escaped from the market, allowing banks to further tighten credit loans to steel traders.
 
Steelease believes although cash flows will turn around in July, liquidity problems will remain. Since Chinese economic growth has slowed, and inflation eased, China's central bank will likely increase liquidity through its open market operation or by lowering deposit reserve ratio.