The latest round of loan default reports started from June this year, when a 690-million-yuan ($112.38 million) loan Sinosteel borrowed from China Development Bank became overdue, and loans from other banks were all extended. The loans are said to amount to 10 billion yuan in total.

"This to some extent indicates mismanagement on the company's behalf," the above-mentioned anonymous securities analyst told International Financial News. "Among the 113 SOEs under the SASAC, few enterprises except for Sinosteel and a small number of other enterprises have overdue loans."

Why the default?

According to the company's website, Sinosteel is mainly engaged in the developing and processing of metallurgical mineral resources, the trading of metallurgical raw materials as well as products and associated logistics, related engineering technical services and equipment manufacture.

The anonymous securities analyst told International Financial News that the company's poor performance has its roots in some ill-advised decisions the company made in previous years. When the SASAC was established in 2003, there were more than 200 SOEs under its administration. Ever since, the commission has set about the task of reorganizing these central SOEs. Under this policy, Sinosteel commenced rapid business expansion after 2003, creating some new domestic companies and participating in some overseas projects, the Channar iron ore project with Rio Tinto being an example of such.

Some would maintain Sinosteel is now being forced to pay the piper for its decision to hastily expand before it was powerful enough. It was reported that Sinosteel entered into cooperation with privately owned Shanxi Zhongyu Steel Co., and the latter at one point owed Sinosteel 4 billion yuan ($651.47 million) by the second half of 2010, catalyzing the financial black hole that the beleaguered enterprise now inhabits.

Zhang Lin, an analyst with Lange Steel Information Research Center, says Sinosteel has come a cropper in several big projects. "Purchase of steel companies in Shanxi Province and investment in iron ores of Midwest Corp. in Australia can all be considered missteps," she said. In her opinion, what is more unfortunate is that the whole industry is in recession, further reducing the investment returns for these projects.

"Rash expansion is a major reason leading to the present difficulty. After the Chinese Government launched the 4-trillion-yuan ($586 billion) stimulus package in 2008, Sinosteel also embarked on runaway expansion of production capacity. It was very usual at that time that different subsidiaries of Sinosteel had overlapping businesses," said Yu Fenghui, an economist, in a commentary piece for The Beijing News. "In the meantime, its overseas expansion is also out of control, purchasing nearly 10 companies in Africa for iron ore and chromium resources. In 2008, Sinosteel acquired Midwest Corp. in Australia, but after that, prices for iron ore started declining, causing serious depreciation of this investment."

Liu Haimin, Deputy Director of China Metallurgical Industry Planning and Research Institute, thinks that more deeply rooted reasons lie in deficiencies in the system of checks and balances governing central SOEs. "For the management teams of central SOEs, successful expansion projects represent their holy grail. If these projects are not successful, they won't have to bear the brunt of responsibility and the government will cover all losses. Therefore, the management teams often ignore risks and just uninhibitedly pursue expansion," he said.

A report released by GF Securities Co. Ltd. warned that across the whole industry, there are risks of some traditional steel trading companies going bankrupt. "With a comparison between the financial data of Chinese and Japanese steel-trading companies among the world top 500 in 2012 and 2013 respectively, we can see that sales revenues of Chinese companies have similar sales revenues to those of Japanese companies, but their average debt ratio is 84 percent, which is 11 percentage points higher than their Japanese counterparts, and that the profit rate of Chinese companies is only 1-13 percent that of Japanese companies," the report says.

Yu thinks that it will be very difficult for Sinosteel, which is mainly engaged in resource-related businesses, to free itself from financial difficulties against the backdrop of the whole steel industry being in serious surplus capacity. Sinosteel will need a long time to recover. It is unlikely that steel companies and steel trading companies would recover from the recession soon, and there may be a serious crisis concerning non-performing loans.

In the aftermath of the default of Sinosteel, the government should be highly vigilant against the spreading of non-performing loans crisis across the whole steel industry and steel trading companies countrywide. "The supervising authority and commercial banks should be fully prepared for this crisis, and they must immediately start examining the quality of loans to the steel industry," Yu wrote.

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