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China's interest rate cuts to bring relief to steel industry


China's central bank's latest interest rate cuts has brought some relief to the sluggish steel market but may not be enough to get a substantial boost.

Industry insiders said that the central bank lowered the one-year benchmark lending rate by 40 basis points to 5.6% and the one year deposit rate by 25 basis points to 2.75%.

According to data from the China Iron and Steel Association, China's 86 large and medium sized steelmakers posted a total debt of more than CNY 3 trillion as of the end of June, of which bank loans reached CNY 1.3 trillion.

A staff member of a bank said that theoretically speaking, as a result of the 0.4% cuts in lending rate, steel companies will save at least CNY 5.2 billion for one year loans.

A market player said that the concurrent rate cuts will help ease steel companies' interest burdens, but only a recovery in demand could boost a substantial improvement in the steel industry which has been saddled with huge debts.

As of August 31, 18 out of 33 Chinese listed steel companies posted a debt to asset ratio higher than 70% and six of them reported their ratio above 80%. Capital shortage remains one of the biggest test for China’s steel mills amid chronic overcapacity and a fall in demand despite an improvement in profits.

CISA's member mills posted a combined profit of CNY 19.282 billion in the first three quarters and, an increment of 71.26% from the year ago level. The number of loss incurring mills accounted for 25% down 6.82 percentage points from a year ago. The combined losses reached CNY 8.086 billion down 29.58% YoY. The rate of return on sale was 0.71% a gain of 0.3 percentage points from the previous year.

The bank staff member said that "Though the cuts in lending rate can hardly change the situation of cash crunch facing steel mills, but it may somewhat help pull up steel demand.”

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