Reuters reported that spot iron ore prices are likely to have extended gains after hitting 2 month highs a day earlier with traders saying firmer steel prices in China encouraged purchases of the raw material amid limited availability of spot cargoes.

Shanghar rebar futures rose for a second day in three to their strongest levels since mid May and a Chinese steel producer sold billet higher than a week ago at a tender, suggesting solid demand for steel.

An iron ore trader in Hong Kong said that there's still demand, some mills are still replenishing stockpiles. Some market participants also expected higher steel prices. But some correction is due. Benchmark 62% grade iron ore .IO62-CNI=SI climbed 1.7% to USD 129 per tonne on Tuesday, its highest level since May 13.

Iron ore, China's top commodity import by volume has gained almost 11 percent so far this month, recovering from a 20% decline in the first half of 2013. Limited supply of immediately available cargoes from top producer Australia, where recent heavy rains drenched parts of its iron ore rich Pilbara region, is also supporting prices.

BHP Billiton said that its output hit a record 187 million tonnes in the year to end June and expansion of its iron ore operations in Australia was running ahead of schedule. Miners such as BHP are keeping output high despite risks that Chinese demand may be curbed by a slowing economy.

Industry data showed that China's average daily crude steel output fell to 2.083 million tonnes in the first 10 days of July from 2.181 million tonnes in the preceding 10 day period.

The most-traded rebar contract for January delivery on the Shanghai Futures Exchange hit a session peak of CNY 3,705 per tonne its highest since May 14. It closed at CNY 3,679 up 0.3%.

Firmer prices suggest steel demand may be picking up this month after prices fell 15% in the H1 of 2013. But with the typically hot July and August slow months for the construction sector, steel consumption may not accelerate further.