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There's too much mining, and too much iron ore. Overproduction will take the price of steel's raw material down by almost a third over the next few years, says Australia's official forecaster. A supply glut could be just part of the problem, because a swathe of Chinese steel makers are burdened with too much debt – and Beijing is not keen on bailouts.

Australia's iron triumvirate – Rio Tinto Group, BHP Billiton Ltd. and Fortescue Metals Group Ltd. – are ramping up production, and chasing market share at the expense of prices. The frenzied digging means that the country's exports of ore are expected to rise by almost a fifth to 680 million tonnes this year. Australia's Bureau of Resource and Energy Economics is predicting that by 2019, the iron ore price will fall from last year's average of $126 (U.S.) per tonne to $87.

The price has already declined by a fifth since the beginning of this year, moving close to $100 per tonne, amid concerns that China's export engine is slowing. China now accounts for half of world steel production and the profits of the big three iron ore producers, Rio, BHP and Vale SA of Brazil, are highly dependent on the appetite of China's steel producers. However, the picture is far from pretty in the People's Republic, where the money is drying up and workers are going unpaid among China's army of private steel producers.

Highsee Iron and Steel Group, a large private firm in Shanxi province, is mired in debt. There is a long queue of creditors and banks seeking recovery, according to Caixin, the Chinese online business magazine. The company owes between 15 and 20 billion yuan ($2.7-billion and $3.6-billion) and the firm has shut five of its six furnaces. Meanwhile, the China Iron and Steel Association has warned that steel makers are facing the worst period since the century began, with high debt levels and metal piling up in warehouses. Chinese banks are running scared of producers, which have joined property developers as one of the sectors vulnerable to liquidity issues. In Hebei province the local government has been warning local banks not to extend credit.

Curiously, in the middle of this steel crisis, iron ore stockpiles in China have been building up to record levels. The continuing demand might give comfort to iron ore producers, were it not for anecdotal reports that private steel makers have been purchasing ore and using letters of credit as short-term financing for their cash-starved businesses. Unfortunately, China's private steel makers can no longer expect a gentle hand from the government which on Monday, abandoned its official steel-industry consolidation target. In an effort to cut the number of small steel makers, thereby reducing inefficiency and bad environmental practices, the government had been urging the major steel groups to buy out small producers, increasing the market share of the big 10 players from 40 per cent to 60 per cent. The policy was counterproductive, leading to even greater inefficiency and the creation of "huge monsters" according to Xu Lejiang, the head of Baosteel, one of the largest firms.

If China's new policy is to let minor steel producers go to the wall, a rude shock awaits iron ore producers. Chinese steel output continues to increase in the face of looming insolvency; China Iron and Steel Association reckons the surplus capacity is some 300 million tonnes, equal to the annual output of Europe. Production in China increased in early March by 1 per cent to 7.09 million tonnes per day but the rise was entirely due to a ramp-up of production from smaller mills, desperate to stay in business. Output by the big players fell by 8 per cent.

The message to the mining community is clear: A big correction is due, and a large mountain of ore may be looking for buyers later this year. In the meantime, we can expect a surge in dumping complaints by U.S. and European steel makers, as China's steel community takes desperate measures to keep the cash flowing.

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