Financial problems may lead to a broad 'domino effect' that could undermine entire sector: Expert

The half-year reports of major steel companies showed signs of improved performances, but hidden financial risks and disordered competition continue to add pressure to the sector, which is bearing the brunt of China's economic slowdown.

Among the 18 listed steel companies that had released their mid-year reports by Monday, 11 reported profits, while seven reported losses. Meanwhile, companies in the red are seeing smaller ranges of losses.

For instance, the Liaoning-based Lingyuan Iron & Steel Co saw its net profit rising by 116 percent year-on-year to 37 million yuan ($6.04 million), while Guangdong Shaoguan Iron & Steel - a unit of Baosteel Group, China's largest steel company - reported a 101 percent increase in net profit.

Magang (Group) Holding Co, which reported the largest loss in the iron and steel sector last year, reduced its losses by more than 80 percent year-on-year, from 3.3 billion yuan to 1.89 billion yuan. Anyang Iron & Steel Co also managed to reduce its losses by nearly 60 percent.

But analysts still see risks in the half-year reports despite the improvements, because a large amount of the profits reported in the first half came from government support and amendments to financial statements.

Of the total 2.97 billion yuan in net profits reported by the 18 steel companies, 611 million yuan, or more than one-fifth, were because of the financial support from local governments.

An obvious case was Lingyuan Iron & Steel Co, which received 388 million yuan in government support during the period the half-year report covers. If that support is excluded, it would have reported 253 million yuan in losses.

Meanwhile, the company has also made changes to its accounting policies to extend the asset depreciation schedule, which resulted in 90 million yuan less depreciable costs in 2013, and 67.5 million yuan more in net profit.