The rise in iron ore prices undermines the logic of the economy

China's switch from industrial production to increased consumption is affecting everywhere, except for the production of iron ore miners. Vale SA, Rio Tinto Group and BHP Billiton Ltd., which together produce nearly half of the iron ore. The data presented data for the September quarter, which looks remarkably robust. At Vale, quarterly production exceeded 100 million tonnes for the first time, up 10 percent from last year.

This confidence has been confirmed by the pricing of their key product. The mystical situation about this price action is that it is undermined by China's consumption data. Apparent demand - both as measured by domestic production and net imports plus reductions from port stocks - has declined this year to its lowest level on a seasonal basis since 2010. August and September are traditionally the peak of the market, but this year's August figure was lower than what we saw at the end of last summer.

The best explanation is that China's infamous data is finally beginning to resemble reality a little. While finished steel is on the low side, the figures for pig iron and crude steel intermediates have jumped to record levels over the past year.

Shipments submitted by China's customs bureau and movements in port stocks are remarkably stable. The real trend this year is entirely due to the collapse in the reports of domestic producers.

This appears to be because iron ore production has been overestimated and the figures for pig iron and crude steel have been underestimated for many years. This is likely a result of how China's Bureau of Statistics relies on a sample of data from larger operations and how the country's ongoing restructuring of this heavy industry is regulating and consolidating a large amount of steel production that previously took place off-record in small furnaces.

However, there is another problem. As noted by the analyst Sanford C. Bernstein & Co. Paul Gate said in a note to customers earlier this year that finished steel output should never be consistently higher than crude steel as production losses usually occur along the way. China also does not import significant quantities of crude steel.

How does this compare with mining data from miners? One of the arguments in favor of Vale, Rio Tinto and BHP has always been that their ore is of better quality than mines in China, with an average iron content of 62 percent or more compared to 40 percent or less in domestic mines. Thus, he was able to supplant a more expensive, low-quality local product, especially since tightening control over products