[Haichuan Case Study] A blast furnace was suddenly affected by a series of serious quality issues during the warranty period; a subsidiary of Liugang Steel filed a claim of 1.353 billion yuan against MCC Sedie

The controversy began in 2022 – not long after the project was delivered, a blast furnace that was still within its warranty period suddenly developed a series of serious quality issues. According to the information disclosed by Guangxi Iron and Steel in the lawsuit, the connection flanges of the blast furnace cooling walls leak frequently, and certain areas of the furnace shell show signs of reddening and cracking; these issues pose a direct threat to the safe and efficient operation of the blast furnace. For steel companies, the blast furnace, as the core production equipment, once it stops operating due to quality issues, it will have a cascading impact on the entire production line. To prevent the escalation of safety incidents and minimize production downtime losses, Guangxi Iron and Steel urgently launched improvements and enhancements to the safety systems of its blast furnaces, allocating substantial human resources, materials, and funds to carry out the repairs. It was precisely these actually incurred renovation costs that formed the core claim of Guangxi Iron and Steel in its initial lawsuit. When the lawsuit was filed in August 2023, the claim amount of 195 million yuan corresponded mainly to the direct costs of repairing and upgrading the blast furnaces. As the case progressed, two adjustments to the amount in dispute became key turning points in the matter. In March 2024, Guangxi Iron and Steel revised its litigation claims for the first time, raising the amount in question to 221 million yuan; this adjustment was interpreted as a claim for additional costs incurred during the restoration process. Liugang Co., Ltd. also disclosed this matter in its semi-annual and annual reports for the same period, but it did not draw widespread attention from the market. What truly shook the industry was the second change in August 2024 – the target amount soared to 1.353 billion yuan, an increase of nearly 6 times compared to the initial amount. Based on the details disclosed in Liugang Steel’s announcement, the core rationale behind this significant adjustment is the \"tracing of responsibilities for the costs arising from production shutdowns.\" After the blast furnaces were upgraded in 2023, they were able to operate safely and stably again and achieve efficient and low-cost production. However, the shutdowns caused by quality issues in the past resulted in indirect losses for Guangxi Iron and Steel that far exceeded the direct costs of repairs. These included risks of failing to meet orders due to disruptions in production plans, costs associated with accumulated raw materials, unused labor costs, and temporary loss of market share – all of which represent hidden expenses. After thorough calculation, Guangxi Iron and Steel included these derivative losses in its claim, demanding that MCC SEDI assume liability for damages amounting to 1.144 billion yuan. Together with the previous repair costs of 209 million yuan plus interest, this results in a total claim amount of 1.353 billion yuan. From a financial impact perspective, this lawsuit holds far greater significance for Liugang Steel Co., Ltd. than an ordinary contract dispute. As of the end of March 2024, Liugang Steel’s latest market value was approximately 6.8 billion yuan, while its net asset value was 8.852 billion yuan. If the claim of 1.353 billion yuan is ultimately upheld by the court, it will result in an increase of over 15% in the company’s net assets. This is undoubtedly a significant advantage for Liugang Steel, which has been facing pressures related to capacity adjustments in the steel industry and fluctuations in raw material prices in recent years. However, Liugang Steel also emphasized in its announcement that since Guangxi Iron and Steel had already paid the costs related to the project, the outcome of the lawsuit would not have any adverse effect on the company’s profits for the current period or subsequent periods. This statement not only alleviates investors’ concerns regarding short-term performance fluctuations but also reflects, indirectly, the company’s cautiously optimistic attitude toward the outcome of the lawsuit. As of the date of disclosure of this announcement, the case is still in the stage of being accepted for prosecution without any hearings having taken place yet; the court has not addressed key issues such as determination of responsibility for project quality and the criteria for calculating losses. However, this dispute has served as a warning for the EPC model in the steel industry: on one hand, large-scale industrial projects involve numerous stages, have long timelines, and are highly technically complex; therefore, EPC contractors need to strengthen quality control throughout the entire process, addressing risks at the design stage in order to avoid cascading losses resulting from minor quality issues ； On the other hand, the owner must also clarify the allocation of responsibilities and the claims process at the contract signing stage, and establish a more comprehensive project supervision and quality inspection system to reduce the risk of disputes in the future.

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