China Steel Group will pay the price for its previous impulsive expansion.

Insiders recently revealed to the First Financial Daily that the State owned Assets Supervision and Administration Commission has basically finalized the merger of the struggling China Steel Group into Minmetals Group as a whole, but this plan still requires approval from the State Council.

A former senior executive of China Steel Group told this newspaper that the asset structure of China Steel Group is similar to that of Minmetals Group. If China Steel Group must be merged into other central enterprises, the best acquirer is Minmetals Group, which can also reduce industry competition to some extent, such as metal trade and resource investment and development.

Punishment for Impulsive Expansion

When our reporter inquired with the publicity departments of both companies about the news that China Steel Group will be merged into Minmetals Group, both companies stated that they have not heard any relevant information.

However, the above-mentioned insiders revealed that the State owned Assets Supervision and Administration Commission has already started relevant preliminary work regarding the merger of China Steel Group into Minmetals Group. "The integration between central enterprises is first and foremost about personnel arrangements, followed by business integration

If China Steel Group, which has assets worth billions, is annexed by Minmetals Group, it would be a great irony to the strategic decision of China Steel's management to expand wildly in the past few years.

Since 2007, China Steel Group has entered a period of rapid expansion, accelerating its transformation into the industrial sector. At the same time, Minmetals Group is also accelerating its transformation into the industrial sector. However, based on the current results, the transformation effect of Minmetals Group is significantly better than that of China Steel Group.

Regarding this, former executives of China Steel Group stated that the company has expanded too quickly in the past few years, pursued scale unilaterally, and ultimately suffered from its own shortcomings.

Due to insufficient experience in the industrial field, a large amount of funds were occupied by cooperative enterprises during the transformation process of China Steel Group. Since 2007, private cooperative enterprises such as Shanxi Zhongyu Iron and Steel Co., Ltd. (hereinafter referred to as "Zhongyu") and Handan Zongheng Iron and Steel Group Co., Ltd. (hereinafter referred to as "Zongheng Iron and Steel") have continuously occupied the funds of China Steel Group through the collection of prepaid loans and advance project payments, and the scale of the occupied amount is relatively large, which has greatly affected their operations.

On January 31st of this year, China Chengxin International Credit Rating Co., Ltd. (hereinafter referred to as "Zhongcheng") stated in its credit rating of China Steel Group and China Steel Corporation that the two companies had occupied a maximum of 12 billion yuan of funds from China Steel.

In addition, due to poor management and industry issues, the debt pressure of China Steel Group has been continuously increasing in the past few years. From 2008 to September 2011, the asset liability ratios were 89.99%, 90.65%, 91.14%, and 91.29%, respectively. As of the end of September 2011, China Steel Group had total assets of 126.856 billion yuan and total liabilities of 115.789 billion yuan, with an asset liability ratio of 91.29%.

According to data from Zhongchengxin, from January to September 2011, China Steel Group achieved a total operating revenue of 1351.23 billion yuan, a net profit of only 65 million yuan, and a net cash flow from operating activities of negative 190 million yuan. China Steel Corporation also faces significant debt pressure. As of the end of September 2011, China Steel Corporation had a total debt of 95.394 billion yuan and a total debt of 67.961 billion yuan. The asset liability ratio and total capitalization ratio are 93.51% and 91.12%, respectively.

What is even more severe is that the liquidity risk of China Steel is relatively high. Because the inventory, accounts receivable, and prepaid accounts of this company are generally large. The price trend of its traded products mainly depends on the production and sales situation of the steel industry. Once the prices of major trading products continue to decline or remain low, it will have a certain negative impact on the company's turnover situation, thereby bringing liquidity risks.

In order to reverse the poor management of China Steel, the State owned Assets Supervision and Administration Commission replaced the CEO of China Steel Group last year. As a result, the overall strategic thinking of China Steel Group shifted from rapid expansion to focusing on structural adjustment and improving profitability, and a special team was established to solve the problem of capital occupation.

Zhongchengxin stated that by reducing the scale of cooperation and transforming the strategic positioning of Shanxi Zhongyu and Handan Zongheng into a general cooperative relationship, the scale of the two companies' use of company funds has decreased from nearly 12 billion yuan at its peak to the current 9 billion yuan.

Without restructuring, it is difficult to reverse the predicament

Zhongchengxin believes that China Steel Group can provide strong guarantees for the 2 billion yuan corporate bonds of China Steel Corporation in 2010, but its own profitability is difficult to provide strong guarantees because "the mud bodhisattva falls into the water, and it is difficult to protect itself".

An insider from China Steel Group told this newspaper that the company has achieved profitability and the overall situation has improved.

China Steel Group has reached a custody agreement with the private enterprise Shanxi Liheng Iron and Steel Co., Ltd. (hereinafter referred to as "Liheng Iron and Steel") for Shanxi Zhongyu. Shanxi Zhongyu, which was shut down for more than a year, resumed production on November 5, 2011. The amount owed by Shanxi Zhongyu to the company will be repaid in installments through Liheng Steel. At the same time, China Steel requires private enterprises such as Handan Zongheng to provide collateral for assets such as land and production facilities, and to control their logistics and cash flow, which has played a positive role in reducing the risk of recovering funds.

However, if it is difficult to achieve profitability, the two companies mentioned above have no funds to repay, and their debt repayment ability mainly depends on the situation of the steel industry. In fact, the steel industry has been facing overall difficulties since the fourth quarter of last year. In the first quarter of this year, domestic steel production shifted from a loss in the main business to a loss in the entire industry. In the first quarter, the steel industry incurred a loss of 1.034 billion yuan while achieving sales revenue of 863.888 billion yuan, compared to a profit of 25.8 billion yuan in the same period last year.

According to the prediction of the China Iron and Steel Industry Association, the predicament of the steel industry may continue for another 3-4 years. Under this trend, the debt paying ability of Shanxi Zhongyu and Zongheng Steel will be greatly weakened.

On the other hand, steel companies cannot make money, and trading companies cannot make money either. As Minmetals Group pointed out at this year's annual group work conference, the steel industry's profit margin has fallen to the lowest level in history due to the decline in steel prices, and the losses of steel enterprises have expanded. The severe operating pressure has squeezed the trade profit margin.

Relatively speaking, Minmetals Group has strong operational capabilities. Although both started as trading companies, Minmetals Group has grown into one of the most profitable companies in the industry, with successful expansion in its resource sector. Especially during the financial crisis, the acquisition of OZ mining assets in Australia was considered a highly successful merger.

Last year, Minmetals Group achieved a total profit of 12.765 billion yuan, a year-on-year increase of 98.47%; The annual operating revenue reached 355.2 billion yuan, a year-on-year increase of 39.71%, and the asset liability ratio remained at 73.83%.