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Manufacturing & Industry

A massive Chinese industry is flashing warning signs that the world cannot ignore


China Steel

China Steel

China’s steel industry, the world’s biggest, is in crisis.

The disaster is the result of a combination of factors, including a slowing Chinese economy, falling commodity prices, and an industry loaded with debt.

Earlier this month, state-owned enterprise (SOE) Sinosteel defaulted on a debt-interest payment of $315 million on bond notes maturing in 2017.

It’s a sign that, despite China’s best efforts at fiscal-policy easing and pledges to reform “zombie” SOEs, the worst may be coming faster than policymakers expected.

The pride of old China

China’s economy is trying to make the difficult transition from one based on investment to one based on domestic consumption, so it’s useful to think of its economy in two parts: new China and old China.

New China includes businesses in the services sector, like technology, retail, and banking.

Old China includes the country’s once booming property and construction sectors, manufacturing, and Chinese exports.

It’s important to note that old China — which includes a bunch of SOEs — is carrying a ton of debt. This has made companies less profitable as they spend significant sums of money making payments on that debt.

As new China rises, old China is fading. But the rising is happening slowly, and the fading is happening faster than anyone thought. The Chinese government faces the colossal challenge of managing this transition without a string of credit events crippling the economy.

That’s where the danger in China’s steel industry comes in.

Asking for help

As Bloomberg reports, Zhu Jimin, the deputy head of the China Iron & Steel Association (CISA), said on Wednesday that collapsing demand is putting the entire industry at risk.

From Bloomberg:

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening,” said Zhu at a quarterly briefing in Beijing by the main producers’ group. “Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Average steel prices hit an all-time low on July 9. CISA notes that in September, steel demand contracted 8.9% from the same time a year before, and medium and large steel mills have lost $4.4 billion in the first nine months of 2015.

The restructure

That means China may need to both clarify and speed up its five-year plan to reform state-owned organizations. Sinosteel’s default indicates that it, and other SOEs carrying a ton of debt, may not be able to wait years for debt restructuring.

“I don’t know how the government can push ahead with the SOE reform, it will be extremely difficult,” one senior executive with China’s top aluminum producer, Chinalco, told Reuters.

Winter is coming. That means construction will slow and demand for steel will weaken more.

And when that happens, China will have to make a choice. Prop up its steel industry or make the rare decision to let companies collapse under the weight of their debt.

Contributed by “Sky in Company” – English/Chinese and Italian/Chinese translation service

Source: Business Insider – A massive Chinese industry is flashing warnings signs the world cannot ignore

 

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About Sky In Company

I am Genevieve Cheung, originally from Hong Kong. After completing secondary studies, I moved to Australia where I completed a degree in Bachelor of Business Management at the VUT in Melbourne. After graduation I moved to Italy where I have been living for more than twenty years. My vast cultural background and extensive linguistic knowledge (speak and write fluent English, Mandarin/Cantonese Chinese and Italian), allow me to join our company- SKY IN COMPANY (HK/ITALY). We provide main services such as web-site translations from Italian/ English to Chinese/English, and SEO services for the Chinese search engine "Baidu". Our offices, based in Hong Kong and Italy, have a young and dynamic team with collaborators around the world. Sono Genevieve Cheung, originaria di Hong Kong; dopo aver completato gli studi secondari, mi sono trasferita in Australia, dove ho conseguito una Laurea in Bachelor of Business Management presso la VUT di Melbourne. Dopo la Laurea mi sono trasferita in Italia, dove vivo ormai da più di venti anni. Il mio background culturale e la vasta conoscenza linguistica (parlo e scrivo correntemente l’inglese, il cinese mandarino e l’italiano), mi consentono di partecipare in quest’attività di traduzione in Italiano/English/Cinese. La principale attività della nostra ditta – SKY IN COMPANY (HK), consiste nella traduzione in lingua cinese di siti web italiani, nonché di servizi di tipo SEO rivolti al motore di ricerca cinese “Baidu”. La nostra ditta principale, con base in Hong Kong, dispone di un team giovane e dinamico con collaboratori in tutto il mondo. WWW.SKYINCOMPANY.COM skyinhk74@yahoo.com.hk HONG KONG OFFICE: Flat b 15/F, Block 7 Yee Mei Court, South Horizon, Ap Lei Chau, Hong Kong Island Hong Kong Tel: ++852 92235260 ITALY OFFICE: Via Metastasio 27 Firenze 50124 Italy Tel: ++39-347 1429011

Discussion

2 thoughts on “A massive Chinese industry is flashing warning signs that the world cannot ignore

  1. I take a strong exception with the biased views highlighted in this article.

    This article is typical of the China articles written for an American audience – to make them feel that perhaps Obama has not been such a disaster – and that China will not eclipse America after all.

    Firstly, the risks in China’s steel and traditional industries are real. BUT the risks can be mitigated. Look how robustly China responded after the 2008 financial crisis which started in the US – China weathered the storm with a massive Keynesian investment splurge – admittedly it caused subsequent problems but it was robust decision-making.

    The article does not compare to the US government bailing out the US motor industry after the 2008 financial crash.

    Yes, the state corporations in China need urgent reform but so does the bloated public sector in the US, the UK, France and Japan – and, of course, the EU bureaucracy is probably the world’s most inefficient bureaucracy.

    Similarly, the ‘old’ and ‘new’ could be applied to Britain’s collapsing public health service, the NHS. In this blog, John Gelmini and I have repeatedly argued in favor of scrapping the NHS and replacing it with a new best-of-breed public health service, leveraging best practice, in countries like Germany, Italy, France and Singapore. The difference between China and the UK is that the political classes in China are ready to act decisively.

    It reminds me of the old saying: ‘People in glass houses shouldn’t through stones’.

    Thoughts?

    Dr Alf Oldman https://dralfoldman.com

    Like

    Posted by dralfoldman | November 3, 2015, 12:51 pm

Trackbacks/Pingbacks

  1. Pingback: Opnion – A massive Chinese industry is flashing warning signs that the world cannot ignore | China Daily Mail « Dr Alf's Blog - November 3, 2015

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