Crashing Steel Prices Lead To Largest Chinese Bankruptcy, "Will Be Followed By Others"

With growth rates for steel products at or near record lows and prices for end-product having plunged to record lows, it is little surprise that the Steel industry would provide the largest Chinese bankruptcy yet in this cycle. As Bloomberg reports, unlisted Haixin Iron & Steel - which halted production and defaulted on CNY3 bn in March - has started bankruptcy proceedings. Having spent 8 months hoping for the government bailout that every Western onlooker believes is every firm's god-given right, a reorganization application for the Wenxi, Shanxi province-based company (with $1.7 billion of total debt) was accepted by the Yuncheng City Intermediate People’s Court. This is just the start as "Haixin Group’s bankruptcy will be followed by others," according to researcher Mysteel.com's Chief Analyst Xu Xiangchun.

 

Output growth (or degrowth) of Steel product is near record lows and still prices are crashing...


As Bloomberg reports,

Haixin Iron & Steel Group, an unlisted Chinese steelmaker that halted production in March because of a capital shortage, started bankruptcy proceedings, making it the largest mill in the nation to enter the procedure.

 

A reorganization application for the Wenxi, Shanxi province-based company was accepted by the Yuncheng City Intermediate People’s Court, according to a statement posted on chinacourt.org, a government site that lists legal proceedings. Creditors are required to claim their rights by Feb. 22, the statement said.

 

China’s slowing economy and the country’s measures to tackle pollution are taking a toll on its steelmakers already plagued by industry overcapacity. Haixin Group’s bankruptcy will be followed by others, according to researcher Mysteel.com Chief Analyst Xu Xiangchun.

 

“Instead of reorganization efforts conducted by local governments, this is an inevitable trend that China will take more ailing steel mills to the courts to protect creditors,” Xu said by phone from Beijing.

 

...

 

Haixin Group has 10.5 billion yuan of debt, compared with 10.1 billion of assets, the official Xinhua News Agency reported yesterday, citing “public data.”

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But apart from the entire Steel industry being on the verge of bankruptcy... China is doing great!

“There has to be a restructuring of the Chinese steel industry,” Eder said.

 

“The iron-ore producers are getting more and more aware that their growth expectations have to be redefined. There are enormous over-capacities and more is coming on stream. This will increase the pressure.”

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Think it's irrelevant - of course you do - except the yield on 3.50% govt bond due October 2015 up 5 bps to 3.660%; headed for biggest daily increase in 1-year sovereign yield since July 21, according to data compiled by Bloomberg.

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But what should be really worrisome is the potential for global contagion (as Bloomberg adds),

It’s a big change. Every year for the past decade, China has added new mills with the capacity to exceed the annual production of Germany, the largest steelmaker in Europe. The surge in new blast furnaces created a consumption vortex, swallowing half the world’s iron ore and creating unprecedented wealth from Australia’s Pilbara region to Brazil’s Amazon basin. That gravy train, generating annual iron-ore sales of about $160 billion last year, is slowing.

 

The major flaw of producers of iron ore, the most traded commodity after oil, is they tend to be “over-bullish,” said Kirill Chuyko, head of equity research at BCS Financial Group in Moscow.

 

“Humans make mistakes,” said Chuyko, who thinks peak steel has been reached. “Chinese demand is going south.”

Surprise!! Artificially low rates and money-printing has led to massive mal-investment and the blowback is beginning...

Mining giants have wagered $120 billion on belief that steel production in China won’t peak until as late as 2030. As the price of the key steelmaking raw material continued its descent to a five-year low today, it increasingly looks like they got that wrong. It’s a miscalculation that could have huge consequences for companies led by BHP Billiton Ltd. (BHP) and Rio Tinto Group.

 

“I’ve always taken the view that the miners had the best intelligence on this as large investment decisions are based on it,” Richard Knights, a mining analyst at Liberum Capital Ltd. said by phone. “But if they get it wrong by a just a small margin, that has major implications for profitability and the share price for years to come.”

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