(Yicai Global) April 26 -- The Chinese steel industry started the year strong, but a high debt-to-asset ratio suggests that the groundwork for profitability recovery still needs to be strengthened, the China Iron and Steel Association said.
Association members recorded profits of CNY23.28 billion in the first quarter compared with losses of CNY8.75 billion a year earlier. The average return on sales remained low at 2.77 percent, suggesting a poor foundation for overall profitability in the industry, CISA reported online today.
CISA warned steelmakers against shortsighted production expansion and reminded them that first quarter gains do not mean the industry will boom all year. Steel companies must be aware that profit recovery is still weak and the general market situation has not changed fundamentally.
Financial leverage is high among steel groups and financing costs are a common issue for industry players. Steelmaking is an asset-heavy business. CISA members' coordinated efforts helped them cut back their debt-to-asset ratios in recent months, but the average was still high -- 69.97 percent -- as of the end of last month.
Steelmakers that applied for loan extensions encountered tightened credit controls. Funding costs and accessibility have not improved. Member's financial expenses totaled CNY89.1 billion last year and CNY22 billion in the first quarter this year.
CISA will continue to push ahead with the industry's overcapacity reduction campaign and will 'fast track' deleveraging efforts.