Thanks for the link PP. What follows is not a criticism of you, but rather the article itself.
I get suspicious when a single graph contains two lines superimposed, that at first glance look closely related, but really aren't. You have to check the scale on each side to see what I mean. On the LHS is RMB/t, starting at 3600; on the RHS is US$/t, starting at $60 => therefore 60:1. So if the scales continue the same way, then on the LHS 6,000 RMB/t would be the same as US$100, but it's not even close to that.
The effect in this case is to exaggerate the possible correlation between rebar and IO prices. Take a look at the black line on the RHS it shows rebar prices dropped from about 4400 (Mar 12) to a touch below 3800 RMB - roughly a 20% decline. At the same time the red line - iron ore - dropped from about US$150 to a touch above $120, also a 20% decline. But you wouldn't know it from a glance.
The author of this graph has falsely played with the scales to get an overlap, but from a scientific/statistical point of view I don't think it means anything - it's designed to scare.
One would also have to question the use of RMB on one side and US$ on the other, given that the exchange rate between the two also varies with time.
The statement "iron ore prices were less than US$100/t the last time Chinese steel prices were at current levels" is true, but I'm not sure a comparison with the depths of the GFC is warranted - at least at this stage.
Reading the article shows another graph that is misleading. In this case the fall in NPAT margin to zero or below is superimposed over steel production - but the zero NPAT is the same level as 50,000 kT per month of steel production. So when NPAT falls from 4% to 0%, monthly steel production falls from 60,000 to 52,000 kT per month. But glancing at the graph, and reading the text, misleads you into thinking that steel production is also falling to the "zero" line.
A more honest graph would show the decline in steel production using a common zero line, showing steel production declining ~20% or so.
The article raises a lot of scary prospects but doesn't really say much.
To me, it seems likely that steel production will fall. At the moment stockpiles of iron ore are at low levels (there's a link on the FMG thread), and if the price falls much below $120 then a lot of Chinese iron ore producers will also stop (it seems logical to me that in a command economy like China that if the bosses call a halt to steel production due to falling margins, they would do the same to IO producers who are not making money as well). The theory goes that the drop in IO supply will help support the price at around $120/t.
All of this supposes that the world economy will remain in the doldrums. I think, however, we'll see a pickup in the economy running through to the end of the year, and I suspect this will lead to a stabilisation, or a small rise, in IO prices.
