Iron ore prices have been disrupted by speculative capital flows and have seen "excessive gains", according to officials at the company known as Baosteel, speaking during a conference call on Tuesday.
Both benchmark iron ore futures on the Dalian Commodity Exchange and spot cargoes of iron ore with 62% iron content surged more than 20% in the first 11 days of May alone, with prices up around 50% so far this year.
Baosteel said the company keeps iron ore inventories within a certain range, with an undisclosed upper limit - which it has reached in the first quarter - and a lower limit some 2 million tonnes below.
It will keep inventories at the lower end of the range in the second quarter, officials said, bearing in mind the prospect of a drop in iron ore prices.
Baosteel, which typically consumes 6.5-7 million tonnes of iron ore per month, said it currently has less than two months worth of ore in stock.
The steelmaker said its parent company China Baowu Steel Group had set up a raw materials purchasing unit to strengthen competitiveness on procurement, and has also been continuing to optimise proportions of iron ore and coal in raw materials so as to ease reliance on mainstream ore.
But to cool the fast rising market "fundamentally", Baosteel said sourcing channels for iron ore need to be broadened.
The producer, which is China's top auto sheet supplier, also found demand from the automobile sector dampened by semiconductor shortages in May and June.
Demand from the home appliances industry is driven by export orders but faces rising cost risks, while the construction sector is seen slowing in the second and third quarters before recovering at the end of the year, it said.
(Reporting by Min Zhang and Tom Daly; Editing by Kenneth Maxwell)