China’s debt-ridden Chongqing Iron and Steel is drawing up radical restructuring plans that will see the firm exit the steel industry and shift its focus to more lucrative sectors like finance, it said on Thursday.
In a notice filed to the Shanghai stock exchange, Chongqing Steel blamed the downturn in the economy, severe industrial overcapacity, soaring labour costs and persistently low steel prices for its predicament.
“In order to fundamentally improve the listed firm’s performance and protect the interests of medium- and small-sized investors, the plan is to remove the company’s steel-related assets,” the firm said.
It said it would sell its steel assets to the Yufu Group, an entity run by the local Chongqing city government. It then aims to acquire high-quality assets in the financial and industrial investment sectors from the group. The plans have not yet been finalised.
The firm suffered net losses of almost 6 billion yuan ($901.47 million) in 2015 and nearly a billion yuan in the first quarter of 2016. Its shares in Shanghai have been suspended since June.
After borrowing billions of yuan to expand production, China’s steel firms are struggling with heavy debts and persistent losses. The country is now aiming to bring capacity down by 140 million tonnes over the 2016 to 2020 period, and will target non-competitive and obsolete assets.
According to government estimates, China has 1.13 billion tonnes of crude steel capacity, more than 300 million tonnes higher than total output last year.
The listed unit of the Valin Iron and Steel Group , based in central China’s Hunan province, is also planning to swap its steel assets for more lucrative finance and clean energy operations to avoid being delisted.
China’s second biggest steelmaker, the Baoshan Iron and Steel Group, was mulling a similar restructuring plan for its loss-making unit SGIS Songshan, but the plan has been shelved.
The government is setting up dedicated asset management firms for the steel and coal sectors to help shut capacity and handle the closure of “zombie enterprises” – those that would not survive without loans or government support.
The State-Owned Assets Supervision and Administration Commission is also encouraging government-run enterprises that are not specialist steel or coal producers to withdraw completely from the two sectors.
According to a recent study by Renmin University, 51.4 percent of China’s listed steel firms could be defined as zombie enterprises because they have been unable to pay back debts.