Xu Lejiang, chairman of Baosteel Group, China's second-largest steelmaker, recently said in an interview with Bloomberg that the rise in international iron ore prices has reached a level of bubble generation. He said that with overcapacity, iron ore prices will inevitably decline. Xu Lejiang said: "There has been a bubble in this market, and many people are speculating." He said: "The result of excessive speculation has led to an increase in iron ore prices, but in the end there will be a day when the bubble bursts and prices will fall sharply." He added: "Now almost every well-funded investor wants to buy or sell iron ore." However, Xu Lejiang did not give a specific time when iron ore prices will fall. According to data released by the Australian Agricultural and Resource Information Survey, the world's three major iron ore producers – Brazil's Vale, Anglo-Australia BHP Billiton and Australia Rio Tinto Group – are expanding their production capacity on a large scale. The three companies plan to invest $45 billion to develop new mines to increase iron ore production capacity. Global iron ore supply is expected to increase by 28% to 1.4 billion tons by 2016. Xu Lejiang said that the Big Three have increased their production capacity because they expect the rapid growth of the BRICS countries represented by China, India, Brazil, Russia and South Africa to generate strong demand for iron ore. He said that this expectation is based on the stable income of the steel industry. In fact, the overall income of the Chinese steel industry has been declining for many years, and the desire of the steel industry to expand production capacity is not strong. Xu Lejiang revealed that the average profit margin of China's steel industry in 2010 was only 3.5%, which is the lowest in all industries. He said that the rising prices of raw materials with overcapacity have made the Chinese steel industry unsustainable. In contrast, the average profit margin of the iron ore giants is as high as 35%, which is a veritable profiteering industry. Affected by speculation and monopoly factors, international iron ore prices have risen sharply in the past five years. The Steel Index data shows that the current spot price of iron ore in Tianjin Port is as high as $175.30/ton, almost three times that of November 2008. Graeme Train, an analyst at Australia's Macquarie Group Ltd., said that iron ore prices will remain high in the second half of this year, and the transaction price is expected to be between $150 and $190/ton. fluctuation. However, iron ore prices will fall sharply after five years. He predicts that iron ore prices will fall back to $80 per ton after 2017, which is more than 50% lower than the current price.
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