Fake Steel Cuts
China’sHebei province, a major steel-producing area, has launched a fresh probe into steel overproduction in the city of Tangshan amid concerns that firms have continued to raise output despite mandatory capacity cuts. Hebei was ordered by China’s central government to investigate firms in Tangshan that have “restricted but not cut production, restricted production but not actually cut emissions, and cut capacity but actually increased output,” according to a provincial notice dated March 25 circulated by traders on Monday and seen by Reuters.
…Tangshan produces around 90 million tonnes of steel a year, more than the whole of the United States.
…Environmental group Greenpeace said in February that China’s active steel capacity actually rose by 35 million tonnes in 2016 after the high-profile closure programme focused mainly on shutting plants that had already been idled.
China boosted credit in 2016 to smooth the production cuts in steel and coal. If companies instead took advantage of the spike in credit and bump in prices, they’re set to be shuttered amid contracting credit conditions. Does China print more or allow more pain?
Only three weeks ago, this was a headline: Hebei aims to shut last ‘zombie’ steel mills in small victory on excess.
Tangshan in 2014: Hebei Tangshan Has 100 Months of Housing Supply; Construction Stopping.
The latest news about Tangshan helped weigh on iron ore prices: Iron ore is copping a drubbing, making it five big losses in the past six sessions
The failed production cuts follows the fake data in Liaoning.
A major employer in Liaoning recently collapsed: China is desperately trying to save a dairy company that, turns out, is too big to fail
The Chinese government can’t afford to let Huishan fail. Credit markets already deeply distrust the rust-belt Liaoning province. Authorities there were revealed to be faking economic numbers, including the province’s GDP growth, from 2011 to 2014. The province was the only province that fell into recession last year. Meanwhile local firms Dongbei Special Steel and Dalian Machine Tool went into default last year.
If Huishan does go bust, the fallout could also be disastrous for some Chinese banks. At least one of them has already felt the chill: Jiutai Bank, which is the dairy maker’s second-biggest creditor, saw the biggest one-day drop in its shares this week. According to Caixin, the small bank’s loan to Huishan currently stands at around $266 million, bigger than its estimate of impairment losses on bad loans for the whole of 2016.
The situation is not much easier for the midsize Ping An Bank, which lent nearly $300 million to Yang’s offshore entity Champ Harvest, with a 25% stake in Huishan as collateral. If Ping An were to write off the loan in full, estimates Daiwa Capital Markets (paywall), its pretax profits could drop by 2% this year.
There’s a lot more of these stories to come if credit continues to tighten.