China’s steel mills concerned by Beijing’s focus on private sector

30-Oct-2018

When the current Chinese leadership took office in 2013, there was much talk about China’s economy becoming more market-driven, entrepreneurial and less reliant on the state. But the country appears to have been moving in the opposite direction in recent years and now Beijing seems to be trying to exert greater control on the country’s private sector.

Like most of China’s economy, privately-owned steel producers do not enjoy the same benefits as their state-owned rivals. One benefit they do possess, however, is flexibility. Therefore, potentially being subject to greater controls – having their wings clipped to a certain extent – is unsurprisingly receiving mixed reactions.

According to China Chamber of Commerce for Metallurgical Enterprises, private steel mills produced 264 million mt of crude steel in the first half of 2018, accounting for 58.55% of total output. This makes the private sector an extremely important part of the steel landscape in China.

Last month, Qiu Xiaoping, vice minister of the Ministry of Human Resources and Social Security, rattled a few cages by saying in a speech that privately-owned companies must improve their “democratic management” to ensure greater employee participation and wider profit distribution. To achieve this, private enterprises must adhere to the principals of the Communist Party and put employees in senior management positions, Qiu said.

It was the timing and tone of Qiu’s speech that generated market chatter. The private sector has already been squeezed by a slowing economy, supply-side reform and increasingly stringent environmental protection demands. Comments about engaging enterprise management and sharing profits through party branches and labor unions further worried some business owners. It also added to the uncertainty at a time when Chinese businesses are concerned about the long-term impacts of the China-US “trade war.” This uncertainty could undermine appetite to further invest in privately-owned businesses.

China’s National Bureau of Statistics publishes industrial sector performance results every month. Mid- and large-sized companies are defined as those with an annual turnover of at least Yuan 20 million ($2.9 million).

In the first eight months of 2018, SOEs, private and collective companies all saw their turnovers and profits rise on a yearly basis. However, when compared with the numbers from January-August 2017, collective and private companies suffered a big downturn.

The private sector’s deteriorating performance is accompanied by rising debt-to-asset ratios. They have been forced to borrow more to survive the slower economy, while banks have withdrawn credit. Higher costs due to upgrading environmental protection facilities, along with more stringent requests to pay employees’ social issuances, have all heaped on the pressure. Amid China’s deleveraging campaign, debt-to-asset ratios have been falling at SOEs, but the ratio for private enterprises has been rising.

Smaller companies have also been hit by fewer tax concessions and a tightening up of shadow bank lending.

Though private companies find it harder to source credit at a time when China is trying to address its soaring debt problems, there has been little impact on bank loans to SOEs. Banks are more willing to lend to SOEs because they are effectively underwritten by local governments that need the revenues and jobs that steel companies generate. Even if an SOE is insolvent, local governments, more often than not, would not allow the company to fail.

In the latest China Credit spotlight report from S&P Global Ratings, it was noted that SOEs had “led improvements in capital discipline, under the close watch of state reformers.” SOEs comprised 63% of the 254 companies in Ratings’ China portfolio, which was down on last year. “The declining trend in SOE composition should reflect the wider participation of private enterprises in the economy and rising services sectors,” S&P Ratings said.

Jiangsu Shagang is the largest private steelmaker in China and is the world’s sixth-largest producer at 38.4 million mt last year. In S&P Ratings’ report, Shagang received a business risk profile score of 4 (fair) and financial risk profile of 2 (strong).

Its major state-owned rival, He Steel Group (formerly Hebei Iron & Steel), China’s second-largest producer after BaoWu, received a business risk profile score of 4 and financial risk profile of 6 (vulnerable). Shagang will likely continue to thrive but smaller privately-owned steelmakers could all be deemed to be “vulnerable,” S&P Global Platts notes.

China’s environmental protection agenda has also hit private companies hard, with some wondering if the tough emissions targets were put in place partly to flush out private mills. To update environmental protection facilities to the requested standards is costly, especially for private mills with less financing support than SOEs.

Source: PLATTS