Debts rise at China's big steel mills, consumption falls

[BEIJING] China's major steel mills added to their debt pile in 2015 while consumption of steel products fell for the first time in two decades, a senior official said on Wednesday, adding to the industry's difficulties as it tries to tackle a crippling glut.

The debt ratio of major steel mills rose 1.6 percentage points to 70.1 per cent from a year ago, taking the big mills'debt to 3.27 trillion yuan (S$700 billion), Li Xinchuang, the vice secretary general of the China Iron & Steel Association (CISA), told a conference.

At the same time, steel product consumption in China fell 5.4 per cent to 664 million tonnes in 2015 from a year ago, the first drop since 1996, said Li, who is also head of the China Metallurgical Industry Planning and Research Institute.

China is trying to rein in its bloated steel sector, and aims to cut crude steel capacity by 100 million to 150 million tonnes within the next five years, as well as ban new steel projects and eliminate so-called "zombie" mills.

However, slower demand and rising debt will put further pressure on the industry, with prices already at multi-year lows.

China's major steel mills produced a combined 601 million tonnes of steel last year, accounting for nearly three-quarters of the country's total output, Li said.

CISA earlier said the country's total annual crude steel capacity now stands at 1.2 billion tonnes. Total production reached 803.8 million tonnes last year, down 2.3 per cent, the first drop since 1981.

The drive to cut industrial capacity will force China to lay off probably 1.8 million workers from coal and steel sectors, and the central government will allocate 100 billion yuan to deal with job losses and tackle debt.

Brazilian miner Vale SA expected 70 million tonnes of global iron ore capacity to be shut down this year and another 30 million tonnes of capacity will also be "at risk", Joao Mendes de Faria, the company's head of China told the conference.

More Chinese capacity is at risk from low prices, with Chinese steel production likely to fall and 100 million tonnes of new iron ore capacity from the majors in Australia as well as Brazil coming on line this year, Mendes de Faria said.

REUTERS