Prices for 62% Fe iron ores have fluctuated within a relatively narrow band of between US$72.7/t and US$79.4/t so far this year to February 20. These price levels remain quite elevated as tightness within the mid- to high-grade market continues to drive premiums and discounts on material of varying quality. China's goals of improving the structure of its crude steel industry and a cleaner environment remain the dominant drivers of 62% Fe prices.
This effort is ongoing despite a seasonal increase in Chinese imports that coincides with stable first-quarter Chinese crude steel production. Downstream industries take up a 23-day holiday following February 16, and Chinese iron ore demand enters a "caretaker" stage, with the industry operating with only skeleton staff. Over 2.9 billion trips are likely to be made as China's migrant workers commute from the cities to the provinces, where their Hukou, or household registration, is assigned, according to China Central Television Station.
Despite this seasonal slowdown in downstream activity, mill margins remain healthy. Chinese rebar margins were assessed at approximately US$143.10/t on February 22 by S&P Global Platts. However, the restocking of iron ore is observably progressing through the chain to become stored as processed stocks of iron ore. Inventories of finished steel across 35 cities and three products have risen 35.2% month over month to 8.9 million tonnes as of February 20, according to Steelhome statistics.
The assessment of rebar margins is positive for iron ore. At current prices of US$78.30/t on February 22, iron ore miners of mid- to high-grade product are charging approximately 54.7% of the profit from the downstream value in 62% Fe prices. This measurement averaged just 40.8% in the fourth quarter of 2017 and shows that short-term strength in iron ore prices can continue while stock-building of steel is carried out. However, the months immediately following the Chinese New Year are typically volatile for iron ore prices. Prices tumbled 26.4% quarter over quarter to average US$63.10/t in the second quarter of 2017, whereas they had averaged US$85.80/t in first quarter 2017. With an imminent move toward destocking along the finished steel supply chain, iron ore prices in the second quarter of this year are likely to experience downward pressure as mills seek to bring their working capital records back into positive territory following the holiday.
We see further downward pressure emerging from China's policy environment as it relates to the steel production sector. The Chinese Ministry of Industry and Information Technology said in January that it will be strict on the announced plans to ban the launch of any new steelmaking facilities in 2018. This leads us to believe that competition among steelmakers, as well as mergers and acquisitions such as the merger between Baosteel and Wugang in December 2016 will put increasing pressure on mills to optimize their working capital and supply chain management. We do expect iron ore stocks to increase marginally in 2018, yet this will be increasingly skewed toward lower-grade material. This is likely to affect discounts on 58% Fe material but not 62% Fe price indexes directly.
We expect there to be marginal upside risk to Chinese crude steel production rates in the second quarter from the 2.1-Mt/day rate recorded in December 2017. We also observe that the Chinese New Year has driven restocking of both iron ore and steel products and these inventories will need to be partially unwound over the course of the second quarter so working capital and the liquidity of efficient mills can be improved. As a result, we continue to hold our price expectations at US$73.70/t in the first quarter and US$55.50/t in the second quarter.