RJH writes...

As bullet-proof is the film, so it seems are iron price hikes.

A year ago the Priory of Sion - sorry, the Big 3 iron ore producers - secured a 71.5% increase in prices largely by exploiting non-Chinese steel mills' fears of insufficient supply in the face of huge Chinese demand.

This year's rise with non-Chinese producers is +19% (same Big 3 strategy - it ain't broke) and it is likely that China's steel mills will have to swallow the same. It does not take a Harvard symbologist to decipher the miners' argument: China's demand compels expansion of supply (read capex) and it's normal that price increases fund this. And, by the way, increased energy costs ramping up miners' operating costs don't help either.

With steel prices relatively soft non-Chinese steel mills must be rabid at the idea of being made to fund more Chinese production. Overcapacity risks include China becoming a net exporter, an outcome that would surely come about concurrent with the deflation - orderly or otherwise - of the Chinese construction bubble. Global knock effects considerable.

But why doesn't Chinese capacity simply calm down via market triggers like iron ore price increases? Da Vinci Code aficionados will know their villain as Silas, the handgun carrying Opus Dei monk. In this production the equivalent is Chinese Central Planning. Having long incentivised the steel sector the government is finding it a bit difficult to break the overcapacity code before time runs out.

(Click for larger image) Exhibit 1: Chinese central planning and steel production, 2003-2006

Sources: Consulate General of People’s Republic of China in NY; China Steel & Iron Association; and MEPS International

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