SHANGHAI (Dow Jones)--The Chinese steel industry will have a tough time in the third quarter of this year amid rising iron ore prices and sluggish demand, Baosteel Group Co. chairman Xu Lejiang said Tuesday.

"It can also be considered a regular pattern as we see some 'consumption fatigue' for our steel plates (for automobiles)" after soaring Chinese auto sales in the past two years, Xu said on the sidelines of a financial forum.

Spot iron ore prices may fall below quarterly contract prices in the third quarter, which may prompt profit-driven small steel mills and trading houses to look for cheaper iron ore on the spot market, Xu said.

"But big steel mills will stick to contract prices even if spot iron ore prices are lower, because we honor a long-term stable relationship with global ore miners."

He also said that small Chinese steel mills may default on their contracts amid falling steel prices in the domestic market.

Xu said iron ore prices will "definitely" fall in the fourth quarter compared with the third quarter as steel mills may undergo maintenance or cut production.

Baosteel is China's second-largest steelmaker by output.