OK, see if you can explain to me, if you will please, how having less of something than originally thought makes it worth less?
Isn’t the fall in prices due to over supply and finite demand?
http://www.businessinsider.com/by-2015-hard-commodity-prices-will-have-collapsed-2012-9
The rest of this ponzi scheme is fractional banking come to its logical conclusion when all the loans default at the same time. When you make too many loans (too low a reserve ratio) you only increase that risk and hasten the day when one or more default totally. They played the odds that only some acceptable portion of their loans would go bad and not all at the same time and only after they had made enough to cover the losses. They lost. Just as they lost the bets on CDS where a statistical failure is a total failure.
But by mass psychology, if people are distrustful of the supply, or, there are so many claimants of limited stocks of steel (for financial reasons) over those few who really need it (for production) the loss of confidence may cause people to turn *elsewhere* (say to Mittal Steel in India, or Australia, or the US) because they are reliably delivering physical steel, causing the price for local "steel" (which may or may not be there) to drop.
Once a few creditors have been burned by non-existent collateral, they will start insisting on rigorous (and, if they are smart, repeated, as stocks can be moved) verification of any claimed stores of steel.
This will present a problem in the following cases:
1) Massive rehypothecation (customer stocks which were used as collateral by the customer, then being used as collateral by the supplier as well)
2) Multiple pledges based upon the same physical quantity (one type of fraud)
3) Pledges made upon entirely fictitious stocks (another type of fraud).
Depending on how much of this has been going on for with steel, and (by extension) throughout the Chinese economy, this could spell the beginning of *really* bad things for China and then the rest of the world (dictatorships start wars to distract attention from their failings; Chinese authorities have *already* barely been keeping the lid on massive unrest from the peasants -- if the nascent middle classes have their temporary prosperity taken from then due to fraud, whether by loss of jobs or accumulated savings by systemic fraud, then the moo goo gai pan will REALLY hit the fan).
Which is another way of restating what you yourself posted. Cheers!