May 25, 2016(Article source: China Business News)
Iron and steel, an industry which had given a huge contribution to China's economy, is also the position of state-owned enterprises. Now under the background of industrial transformation and upgrading, it began to appear industry wide losses in 2015 and became an important industry for de-capacity, which is one of the five tasks of reform.
On May 23, when Premier Li Keqiang did a survey at WISCO, he had repeatedly stressed de-capacity and said “Dissolving overcapacity should be a key point for WISCO to grasp and also should make it as a sample.”
However, the embarrassing situation is although there appears overcapacity, the market gap is still great in our country for high-end steel, which we have to import a large amount from other countries. So Li Keqiang also emphasized iron and steel industry needs innovation, and then opens up a road of high technology.
Another problem steel enterprises facing is high debt ratio. Qian Haifan said “Most of the iron and steel enterprises also face dilemmas such as high debt ratio, bank credit limit, overweight social burden and hard to exit the market, etc.” Zou Jixin, Deputy General Manager of WISCO also said the company’s asset-liability ratio is about 70%, and common benefit for business entity is not good and debt service pressure is big. So there is still a long way for reduction of personnel and debt.
Statistics show that presently the asset-liability ratio of iron and steel enterprises in China are generally high. Key iron and steel enterprise asset-liability ratio was 70.1% in 2015, the first time passed70%; and some small and medium-sized enterprises were even higher. This is also the main reason for some iron and steel enterprises to suspend production. And now iron and steel has become an industry that the banks adopt credit limit and loan-cherishing policy.
Regarding the debt problem, during the survey at WISCO, Li Keqiang had required NDRC(National Development and Reform Commission) to assign special persons to WISCO to do concrete research, discuss how to reduce leverage, so that debt can be somewhat eased and enterprise financial cost can be reduced.
We say steel industry dilemma is a social problem is mainly because it involves personnel placement. Li Keqiang asked straight forward on the forum at WISCO “What are the problems WISCO facing and what support do you need from the country?” Ma Guoqiang, President of WISCO, mainly said 2 problems: one is redundant staff, and the other is heavy debt loan.
WISCO’s official statistics show WISCO has completed the work of shunt placement for 14,000 staff after nearly five months efforts. But from the metrics such as per capita output of 1000 tons of steel, WISCO still has problems such as low labor productivity and high labor cost etc.
Ma Guoqiang said before, replacing the surplus personnel appeared due to “de- capacity”, they will adhere to the principle “Only position transfer but not to be laid off; only job transfer but not to be unemployed.” Mainly methods as follows: Staff within 5 years of compulsory retirement age, if he/she has no work ability or work desire, he/she can leave the post and wait for retirement; Conduct business return to internal transfers and encourage non-steel industry to absorb part of the workers; Work with local government and other employers to organized labor export and to find new jobs for staff; Encourage self-employment, combined with its own characteristics and the level of staff skills, each company can assign employees by carrying out multi-channel replacements.
Li Keqiang also said to the person in charge of SASAC at meeting that WISCO should be a key focus on how to efficiently replace surplus personnel of enterprises. He also emphasized we must ensure for the surplus personnel “only position transfer but not to be laid off; only job transfer but not to be unemployed.” And the Social Security should be responsible for persons that have difficulties.
Overcapacity concerns
The source reason for wide losses, big financial pressure and personnel placement difficulties is overcapacity for the whole industry under the background of economic transformation.
According to China Iron and Steel Industry Association statistics, as of the end of 2015, China's crude steel production capacity had reach up to1.13 billion tons, which has not included illegal production capacity. However, the crude steel output in 2015 was only 803 million tons. Capacity utilization is only 71.06%, and nearly thirty percent of production capacity is idle.
A number of insiders from iron and steel industry said to “China Business News”, presently, China’s iron and steel enterprises lack market withdrawal system. This mainly can be seen from the following: local protectionism (due to enterprise is local major tax payer, if the enterprise losses, the local government will provide various support through credit, financial and tax etc. so that the enterprise can survive other than withdraw from the market.); Lagging of Social Security System and difficulties to deal with bank bad debts and stagflation make some enterprises at a competitive disadvantage cannot withdraw successfully etc.
In Qian Haifan’s opinion, the practice of de-capacity that only relies on market-oriented adjustment has been confronted by difficulties, so it is imperative to establish a “Institutional Supply” system to speed up the supply side reform of steel industry.
Take the de-capacity experience of European countries and America as the example, the governments assumed a considerable part of social cost of steel enterprises. With policies in finance, tax, industry and so on, they succeeded in propelling merger and reorganization, increasing consumption, promoting the transfer of capacity to overseas, abandoning outdated capacity, encouraging steel enterprises to extend their industrial chain to the downstream and thriving tertiary industry by directing into it the surplus labors of steel industry.
“Moreover, enterprises should also make effort to explore the future development direction of the market, make plan for their own capacity, rationally restructure products, make innovation on marketing mode and intensify technical development.” According to Qian Haifan, Ma Steel will initiatively discard steel capacity of 4.2 million tons and extend the use of a part of construction steel to bearing, spring, fastener, train axle, home appliance and section bar. “The main purpose of adjustment is to replace imported products to cater to the development of demand side.”
China Business News knew from WISCO. yesterday that the Group had initiatively removed nearly 5 million tons of outdated capacity. This year, since it has completed de-capacity, it plans to voluntarily abandon steel capacity of 4.42 million tons and iron capacity of 3.19 million tons. The Group plans to shut down 1 blast furnace (1 × 1,536m3), 1 converter (1 × 90t) and bar production line of steel rolling. It will cut the output of its cut deal production line and centralize the production to meet the demand for steel for special use.
After listening to the report of WISCO, Li Keqiang emphasized that the group should serve as an experimental enterprise of steel de-capacity. He said, “An experimental enterprise will definitely run into hardship as the pioneer, but it will get more support from the country. Being an experimental enterprise is politically favorable but you should also work harder”
At the same time, it is embarrassing that the serious supply deficiency in China’s high-end steel market coexists with excessive capacity. A large amount of high-end steel is imported. For example, the development of ultra-high voltage needs a great quantity of silicon steel.
In this regard, Li Keqiang expressed, “WISCO is a national force, so it must innovate to produce more new products to replace imported products.”
