**Abstract**
Few people realize that steel companies, still struggling under the combined pressures of falling steel prices, shrinking profits, and rising debt ratios, are enduring one of the worst winters in recent years. In this challenging environment, many steel firms have announced their interim results. So far, out of the 35 listed steel companies in Shanghai and Shenzhen, 19 have released their half-yearly performance reports, with 7 reporting losses and 12 showing profits. Although the overall outlook remains bleak, there is a slight sense of hope from a performance standpoint.
Behind this faint improvement, however, lies a more complex reality. Many industry insiders point out that government subsidies have become a key factor for some steel companies to avoid losses or even turn a profit. This reliance on financial support from local governments has raised concerns about the sustainability of these gains.
On August 26, Wuhan Iron and Steel (WISCO) released its first-half performance report. While its operating income dropped by 2.01% year-on-year to 44.398 billion yuan, the net profit attributable to shareholders increased significantly by 241.32%, reaching 461 million yuan. A closer look reveals that WISCO’s non-operating income in the first half was 46.397 million yuan, with 42.534 million yuan coming from government subsidies.
This trend is not unique to WISCO. In the first half of 2013, several other steel companies, including Lingang and Xiaohang Steel, also received significant government support. According to statistics, in 2012 alone, the total government subsidies for the 35 listed steel companies in Shanghai and Shenzhen reached 6.145 billion yuan, with Chongqing Iron and Steel receiving the largest amount—2.01 billion yuan.
In 2012, WISCO reported a total profit of 112 million yuan, but it received 345 million yuan in government subsidies. Similarly, Linggang’s half-year results showed a net profit of 36.927 million yuan, up 115.92% from the previous year, largely due to a 380 million yuan government subsidy. Meanwhile, Hangxiao Steel, which made a modest profit of 7.39 million yuan, also benefited from a 3.02 million yuan subsidy.
Over the past three years, as the steel industry's net profits continued to decline, the amount of government aid received by steel companies has steadily increased. The figures show that the 35 listed steel companies in Shanghai and Shenzhen received 1.143 billion, 3.057 billion, and 6.146 billion yuan in subsidies in 2010, 2011, and 2012, respectively.
Experts warn that while these subsidies may temporarily boost performance, they do not reflect the true health of the industry. Hu Yanping, an analyst, pointed out that although the performance appears to be improving, the underlying fundamentals remain weak. The industry's profitability is still low, and the competitive pressure continues to weigh heavily on steel companies.
According to Zhang Changfu, vice president of the China Iron and Steel Association, the industry’s profit growth in the first half of 2013 was mainly due to a low base from the previous year. In reality, the economic benefits of the steel industry have been declining month by month, with large and medium-sized enterprises facing losses in June.
The data shows that member steel companies achieved a net profit of 2.267 billion yuan in the first half of 2013, with a sales profit margin of just 0.13%. When excluding non-core business profits, the core operations were actually in deficit. At the same time, the debt-to-asset ratio of key enterprises rose to 69.5%, the highest since 2006.
Additionally, the steel trading sector has seen a further decline. Many traders are reducing their operations, cutting costs, and even exiting the market. In Shanghai, 80% of steel traders have scaled back, with some businesses now operating in name only. The number of steel traders has dropped by about 50% compared to the peak period, while in Tianjin, the reduction is around 15%-20%.
While government subsidies provide temporary relief, they cannot solve the long-term challenges facing the steel industry. As the sector continues to struggle, the real question remains: how sustainable is this "artificial warmth"?
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