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 (NYSE: CLF ) provided a fascinating glimpse.
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 (NYSE: BTU ) and South Korean steelmaker POSCO (NYSE: PKX ) , but Cliffs' management spelled it out for us.
Revealing a loss of $7.4 million, including a $9.1 million equity loss on the Amapa joint venture with Anglo American (Nasdaq: AAUK ) , Cliffs tells the tale of two disparate regional realities. According to top executive Joseph Carrabba: "While our North American businesses are suffering from the dramatic drop in steel production in North America and Europe, our Asia Pacific businesses are performing quite well, given the difficult demand environment for steelmaking raw materials around the world."
The biggest operating loss came from North American coal operations, leaving Fools relieved that Cliffs called off the merger with Alpha Natural Resources (NYSE: ANR ) . With bellwethers like U.S. Steel (NYSE: X ) operating at just 38% of capacity, and miners like Arch Coal (NYSE: ACI ) expecting metallurgical (met) coal sales declines of up to two-thirds in 2009, the North American market has frozen.
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.