* Coal, aluminium firms amass at least $490 bln in debt
* Financial position deteriorating, raising risk of defaults
* Big part of borrowing is more risky mining-related trust funds
By Fayen Wong
SHANGHAI, Aug 14 (Reuters) - China’s slowing economy has hammered businesses supplying the raw materials for growth, with coal and aluminium firms at risk of defaults and closures after clocking up at least $490 billion of debt in a rush to expand.
The debt mountain highlights the systemic threat posed by China’s smokestack industries, which Beijing wants to slim down after a stimulus-fuelled investment boom launched in 2009.
Some recent data has raised hopes that China’s economy is stabilising, but growth has slowed for nine straight quarters, piling pressure on these sprawling sectors, just as China has pushed banks to tighten credit to companies.
“The inevitable is that we do see liquidity issues and failures for some of these companies and I think that will happen over the next six to 12 months,” said Andrew Driscoll, head of resources at CLSA Asia Pacific.
Nearly 90 percent of mainland-listed coal firms posted a profit drop in 2012, with total profits at a five-year low.
Once market darlings, the financial position of Chinese-listed coal firms has deteriorated.
Falling revenue has forced some miners to either delay payments or borrow money to pay salaries, according to the China Coal Association.
With new mines coming onstream and imports still growing, the outlook for the coal sector, where prices have fallen to four-year lows, looks grim.
The median debt-to-equity ratio of listed coal firms jumped 15 percentage points from a year ago to 55 percent, compared to 13 percent for Australian counterparts, according to Thomson Reuters data.
Aluminium and steel firms are even worse off, with ratios of 121 percent and 113 percent, respectively.
Problems have been surfacing in other traditional industries such as steel and shipbuilding.
Steel minnow Pingte Iron and Steel Co Ltd declared bankruptcy in June and shipbuilder Rongsheng Heavy Industries Group had to ask for financial help from the government.
Thomson Reuters data shows debt held by 36 listed coal firms stood at 285 billion yuan ($46.55 billion).
If the borrowing of state and unlisted firms is included, debt held by Chinese coal miners and washeries rose 23 percent to 2.67 trillion yuan at the end of 2012 from a year ago, according to data from the National Bureau of Statistics obtained by research firm Askci Corp.
As China’s economy has slowed, money owed by clients to major coal miners has also jumped by about a half to 68.8 billion yuan in the first five months of 2013, straining cashflows.
“Industries that face over capacity problems will go through a tough restructuring in the second half. The big firms will get bigger but the smaller ones will fail,” said Helen Lau, senior analyst for China’s commodity sector at UOB-Kay Hian.
Chinese aluminium firms tracked by Thomson Reuters Business Classification Index reported a loss of 5.7 billion yuan last year, reversing a profit of 5.3 billion yuan in 2011.
In the coal and aluminium sector, investors have been selling out of firms with high debt.
Xingfa Aluminium Holdings Ltd, Yunnan Aluminium Co , coal firms Xinjiang Baihuacun Co Ltd and Qinfa Group Ltd have lost more than half their market value since 2010. The firms have a debt-to-equity ratios of more than 200 percent.
Twenty-five listed Chinese aluminium firms are holding 293 billion yuan of debt. Data on all firms was not available, but even without this aluminium and coal firms could be holding at least 3 trillion yuan ($490 billion) in debt.
To put this in perspective, that is about three quarters of the debt China’s 36 local governments have accumulated, which itself prompted a warning by the state auditor about the financial risks posed.
Faced with a cash-flow squeeze, many firms have turned to the bond markets and private lending to refinance bank loans coming due.
Nine coal miners have raised a total of around 13 billion yuan from the domestic bond market this year, with six saying they would use more than half of the proceeds to pay down debt.
All four aluminium firms that have issued bonds this year plan to use the funds to improve their cash flow and repay debt.
Some bonds are trading at levels only distressed debt investors are likely to buy, analysts say.
In addition, aluminium and coal firms have raised huge sums via mining-related trust products since 2011.
Trust funds, a lightly regulated market where money is channelled to a wide variety of investments, are an increasingly popular option for smaller firms struggling to get bank loans.
But an extended slump could also lead to defaults in the trust sector.
Chinese trust firms have set up nearly 100 mining-related trust funds, issuing a combined 27.3 billion yuan, according to data by industry portal www.Use-Trust.com.
At least 70 mining trusts, which offer average returns of around 10 percent, are due to pay up by the end of 2013 and any defaults could send waves through the financial sector since many banks also have exposure to such assets.
Huarong International Trust, which offers coal-related products, said it did thorough due diligence before issuing loans and require assets, such as mines, for collateral.
But there have been problems and China Credit Trust Co, one of the biggest trust companies, has said its trust product was at risk of default after coal company Zhenfu Energy Group defaulted on a loan.
Citic Trust Co, a subsidiary of state-run China Citic Group, was forced to auction debt in April from a steel-related trust that failed to pay interest and principal.
“Many companies tend to turn to trust loans when they face financing troubles. A breakdown in this financing chain would eventually lead to a default on debt,” said Zhang Zhiwei, chief China economist at Nomura Holdings in Hong Kong.
$1 = 6.1217 Chinese yuan Additional reporting by Patturaja Murugaboopathy and Umesh Desai in HONG KONG; Editing by Michael Urquhart and Ed Davies