The recent slide in iron ore prices was "inevitable", with a price above $100 a tonne still too high, the head of China's biggest -listed steel maker Baoshan Iron & Steel (Baosteel) said on Tuesday.
China's steel sector, buyer of around two thirds of global seaborne iron ore supplies, faces huge challenges this year, with demand weak and the government desperate to close outdated and polluting mills.
With many mills now unable to keep producing due to falling prices, mounting losses and credit restrictions, He Wenbo, chairman of Baosteel, said iron ore prices that have lost more than a fifth of their value this year had further to fall.
The strength of prices in the last few years had caused "injury" to the steel sector and to China, He of Baosteel said.
"Prices have been irrational and the current decline is inevitable," he said. "What will be the low point? I think that current prices of approaching $100 are still on the high side."
Iron ore for immediate delivery to China fell 8.3 percent on Tuesday, the largest one-day percentage fall in 4-1/2 years, to $104.70 a tonne, according to data compiled by The Steel Index.
Big iron ore suppliers such as Rio Tinto , BHP Billiton and Vale have been counting on sustained increases in Chinese demand to justify their big capacity expansion plans.
But He of Baosteel said China's steel output could stop growing by as early as 2018.
Baosteel is forecasting China's apparent steel consumption would rise 3 percent to 750 million tonnes this year, but total production was actually getting close to its peak.
"We are predicting that demand is likely to continue rising until 2018 or 2020, but I think by that time it will be the peak for Chinese steel production and it won't rise any further," he said.
"Over the next 10 years, from the continued increases, then stopping, then a probable fall in production, crude steel production will stay at around 700 or 800 million tonnes, which is still a huge amount."
QUALITY NOT QUANTITY
With China desperate to curb excess capacity in its bloated and ill-regulated steel sector, local governments have been under pressure to close down struggling smaller mills. Hebei , China's biggest steel producing province, could close in excess of 15 million tonnes of capacity this year.
He of Baosteel said on top of the planned government closures, more Chinese steel firms could be forced to shut this year due to economic pressures.
"Steel is a sector where market forces prevail the most and we can rely on market mechanisms more and more to resolve these problems," he said.
Gao Hongzhi, the Communist Party secretary of Handan, a major steel producing city in Hebei province and a key target of China's closures, said last week that regions should be allowed to build new, better-quality steel capacity to replace mills that are being forced to shut.
Baosteel's He said he agreed with the proposal and said the firm was replacing capacity set to be closed in its home city of Shanghai with the giant Zhanjiang steel project expected to go into full operation in early 2016.
"To curb overcapacity you can't just close outdated capacity -- you also need to encourage better quality capacity to be built," he said. "I approve of this: why not support the construction of new capacity?"