China’s steel industry is in deep waters due to low steel prices and overcapacity, evident in its balance sheet. As of the end of the first quarter of 2013, China’s top 30 publicly traded steel companies have total current liabilities amounting to 759 billion yuan ($124 billion), and their current assets are only 530 billion yuan ($87 billion).
This figure was calculated by Sheng Zhicheng, the deputy secretary general of the China Steel Logistics Committee of the China Federation of Logistics & Purchasing and reported by Yicai, a top Chinese financial newspaper. According to Sheng, these firms’ total liabilities increased by 26.9 billion yuan ($4.39 billion) compared to the same period last year.
Current liability is a core component of a company’s balance sheet. It can be understood to be the company’s debts or financial obligations that are due within a calendar year and typically include short-term loans, bills payable, accounts payable, employee salaries, and taxes and dues payable.
On the other side of the balance sheet is a company’s current asset, which is the asset a company holds that can be converted to cash or used to pay current liabilities within 12 months.
“Having higher liabilities than assets is problematic for a company’s operations,” Sheng said. The ratio of a company’s assets to its liabilities is called its “current ratio” and measures its ability to pay short-term obligations. Within these 30 firms, Xining Specialty Steel’s current ratio is 0.28, Yicai reports.
In absolute terms, at the end of Q1, the current liabilities of Hebei Iron And Steel Co. (SHE:000709) outweigh its current assets by as much as 45 billion yuan ($7.34 billion), the largest gap of the 30 steel companies. In the first quarter, the company reported a net profit of 43.8 million yuan ($7.14 million), an 87.82 percent decrease from the same period last year. Six other companies’ current liabilities outweigh their current assets by more than 10 billion yuan ($1.63 billion).
Steel companies’ current difficulties are due to the slumping of the steel industry recently, as well as an overcapacity issue in China’s steel industry. Most of the 10 largest cities saw dramatic decreases in steel prices in the middle of May. With low demands, steel companies were forced to lower their prices.
Last year, steel was among the biggest overcapacity industries in China, according to Yicai. Specifically, the rate of capacity utilization of crude steel was as low as 75.8 percent.