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Dire warning to iron ore miners

In an ominous warning to Australia’s iron ore miners, the head of China’s largest listed steel producer says there will be an oversupply of iron ore very soon.

The chairman of Baosteel, Xu Lejiang, speaking at a press conference in Shanghai on Tuesday, said that China will not embark on a fresh round of fiscal stimulus, which will see only moderate growth in steel production this year. “Steel production is much higher than demand in China,” he said.

Mr Xu said he expects steel production to grow at between 1 and 2% this year, well below the massive growth levels of recent years. Rio Tinto Limited (ASX:RIO) is expecting production to grow at a compound rate of 3% over the next decade, according to the Australian Financial Review (AFR). Rio also expects steel production to peak at around 1 billion tonnes after 2020, but that appears very optimistic, given current production of 716 million tonnes in 2012 and the low levels of growth predicted by Mr Xu.

“In the last 12 years there was a big miss-match between iron ore production growth and steel production growth, but it will be the opposite in the future,” said Bao Steel’s Mr Xu. He said iron ore production growth would soon far outstrip growth in steel production.

According to the AFR, Chinese steel mills ramped up production at the end of 2012, in expectation that the incoming leadership would take steps to boost the economy by rolling out new projects. That hasn’t happened, and iron ore prices have fallen by 30% from their highs in recent months. Steel prices in China have fallen to their lowest level since April 2009, says the AFR.

As iron ore demand is falling, Australia’s big iron ore miners Rio, BHP Billiton (ASX:BHP) and Fortescue Metals Group (ASX:FMG) have been ramping up production, but it could all end in tears.

Foolish takeaway

People may have forgotten that during the global financial crisis, Mount Gibson Iron (ASX:MGX) had some of its iron ore shipments turned back by Chinese customers, forcing the company into a $162 million capital raising to survive. Foolish investors may want to reconsider their investments in iron ore producers.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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