-- Exclusive Interview with Steelease Senior Analyst Yao Xinghang
SHANGHAI, Apr. 23 (SMM) – The crisis for steel traders in the Yangtze River Delta recently has attracted wide attention, while many steel mills are reporting meager profit.
Data from the China Iron & Steel Association revealed that the profit for three iron ore giants – Vale, BHP Billiton and Rio Tinto – was 500% higher than profit for 77 large steel mills in China in 2011. Furthermore, the net profit for Vale alone was equal to aggregated profit from all steel stocks in A-share market in the past five years. Thus, steel mills obtained razor-thin margins or even suffered loses at the expense of huge water and energy consumption and the heavy pollution.
What should Chinese steel mills do to get out of the tough situation? Journalist from the Securities Daily interviewed Steelease Senior Analyst Yao Xinghang.
Disorder and Greed Lead to Crisis
Journalist (J): The crisis of steel traders in Shanghai has become a hot topic across the industry recently. Steel traders were charged by many banks due the tremendous bad loans related to steel traders. Plenty of enterprises went bankrupt and some steel traders reportedly ran away. What do you think caused this situation.
Yao Xinghang (Y): From what I can tell, traders’ greed and speculation should be mainly responsible to the current situation. Steel products were usually pledged by steel traders for obtaining bank loans back in 2010. For instance, one trader purchased steel for RMB 10 million. Instead of selling these goods in the market, they took the steel as security for a loan. In addition, some warehouses in league with steel traders issued several receipts for the same goods, so as to get loans from different banks with the same batch of goods as security. This means traders could obtain RMB 30-40 million of loans for spot goods worth RMB 10 million, and this number could be even higher for informal lending or property investment.
J: But this whole system collapses when it runs out of cash against the depressed economy at present, isn’t it? How many traders were involved in such tricks?
Y: Indeed, that’s why many traders went bankrupt. As much as 70% of steel traders were conducting such operations a few years ago, but the industry will undergo a reshuffle after the crisis. Traders’ greed is the source of this crisis, but banks also have part of the fault, as they knew clearly the risks of traders’ actions, so they also paid a price.
Low Margins from High Consumption and Heavy Pollution
J: According to data of the China Iron & Steel Association, the profit for three iron ore giants – Vale, BHP Billiton and Rio Tinto – was 500% higher than profit for 77 large steel mills in China in 2011, and even higher than total profit of China’s steel industry. How do you think of the huge difference?
Y: China witnessed a shift from shortage to surplus in steel industry in 2005, but domestic iron ore capacity began falling short, which put an issue under spotlight. The grade of China’s domestic iron ore is usually between 20%-30%, while grade of the low-cost iron ore from Australia and Brazil is above 60%, creating fat profits.
The three iron ore giants getting hold of a majority of high-grade iron ore in across the world manipulated iron ore prices. Given the large amount of steel mills in China, domestic iron ore could not meet demand from steel mills, so China had to import iron ore from the three giants. Meanwhile, steel industry requires high energy consumption and produces considerable pollution. China has an estimated 200 million mt of excess rolled steel capacity. The severe overcapacity and fierce competition resulted in low profit margins. In this context, Chinese mills earned little at the cost of high energy consumption and heavy pollution.
“Windfall Profit” Era for Large Mines Expected to End in 2015
J: Did steel mills improve their technology against such circumstances? Did they adopt any measures to deal with the monopoly? Is it possible to break the current structure?
Y: In fact, China’s steel industry has been developing rapidly over the past few years in terms of both capacity and technology. For instance, almost all steel used for building Jinmao Tower in Shanghai, which was initiated in 1994, was imported, as China was not able to produce steel to construct such a tall building. In 2002, however, when the Shanghai World Financial Center was built, 90% of the steel was produced domestically.
I think the three large mines will no longer see waterfall profits in 2015, as iron ore market will swing into a surplus in 2015 and 2016 with iron ore capacities coming online both at home at abroad. Thus, iron ore prices will fall, and the structure in steel industrial chain will change.
China Capacity Optimization Still Far-Reaching
J: Most of products produced by Chinese steel mills were building materials and band steel with low technology content, so where are Chinese steel mills heading to? What should they realize capacity optimization and improve technology?
Y: China has been committed to promoting consolidation and capacity optimization in steel industry. However, this is an arduous task, and it may take another 10-20 years for China to achieve real optimization.
Edited by SMM