Truth disappears the moment it comes into view, leaving behind the faint proxies that we call convictions.
As the true extent of the financial crisis came into view last year, debate ensued between those who envisioned China's economic fate decoupling from decline in the U.S., and those who expected a global economy to yield a shared fate for all. As China's industrial furnace cooled virtually overnight, many presumed that the decoupling theory had been debunked.
I have suggested that the debate may now require revisiting, and last week's earnings report from Cliffs Natural Resources
Cliffs' combination of iron ore and coal offers valuable insight into the steel industry, but it is the company's dual geographical focus that informs the decoupling debate. Cliffs operates mines in Australia serving the Asian steelmakers, while North American operations serve the domestic and European steel markets.
By contrasting the performance of these segments, investors will see an emerging dichotomy of industrial demand between China and most of Asia on the one hand, and the U.S. and Europe on the other. I found supporting evidence in the earnings releases of Peabody Energy
Revealing a loss of $7.4 million, including a $9.1 million equity loss on the Amapa joint venture with Anglo American
The biggest operating loss came from North American coal operations, leaving Fools relieved that Cliffs called off the merger with Alpha Natural Resources
Iron ore operations languished in losses with a 27% sales decline and a 59% cost increase. Meanwhile, Cliffs' Australian iron ore mines returned a $57.5 million profit, and the Sonoma coal partnership with Asian steelmakers added $28.7 million. Significant care is required to place Chinese demand in the proper perspective, but at least we know the decoupling debate is alive and well.