Photo: AFP
Photo: AFP

Banks may see a jump in steel sector non-performing loans next year if Beijing’s hard-nosed attitude about slashing more ironmaking capacity next year comes to fruition without a commensurate plan on how to deal with their legacy borrowings.

Much of China’s steel production capacity which is earmarked for the chop as part of Beijing’s multi-year initiative to streamline the fragmented sector, was originally paid for with bank loans secured by using the equipment as collateral. In many cases these loans have not yet been repaid.

At present there is no clear consensus from Beijing on the treatment of these equipment-backed loans, a National Development and Reform Commission official told a steel industry conference on November 9.

However, once the surplus-to-requirements facilities are totally decommissioned under the pressure to achieve policy objectives, in the worst scenario, the disappearance of these pledged assets means the banks will lose their collateral and see the loans sour.

The NDRC official said that most steel companies have opted to comply with the capacity removal goal up to a certain degree by disassembling the power sections of the steel furnaces, rather than dismantling the whole plant. This buys the steel mills some time to deal with labor issues.

But they are likely to come under greater pressure next year when they face a much more demanding capacity removal target, as various officials have been widely reported as saying.

This year, 73.5% of the cuts have been achieved through long-dormant plants, so next year’s reductions will have to focus on functioning capacity, Caixin reported without citing anyone.

China plans to cut 45 million tons of steel capacity this year and 100-150 million tons in the next three to five years.