The price of iron ore has struck a two-and-a-half-year high, continuing to defy pessimistic forecasts from analysts amid stockpiling in the lead-up to the quiet Lunar New Year holiday period.

Numbers from The Steel Index show iron ore shot up 4.1 per cent to $US83.50 a tonne overnight, up from $US80.20 previously.

It is the best price reading for Australia’s key export since September 1, 2014.

The news boosted the UK stock of local heavyweights BHP Billiton and Rio Tinto, with jumps of 1.7 and 2.1 per cent, respectively.

It was around this time last year that iron ore began the last leg down in a multi-year bear market to ultimately reach a 10-year trough around $US38 a tonne in February 2016.

Since then the commodity has more than doubled on Chinese stimulus aiding the steel sector and speculative trading.

Analysts have been noting a rise in stockpiles in China ahead of Lunar New Year, with the annual celebration all but shutting down the country for the better part of two weeks.

Lunar New Year falls on January 28 this year.

ANZ strategist Katie Hill also noted rising sentiment in the Chinese steel market as a key factor behind the latest rally.

“Steel rebar futures climbed 5.7 per cent in China as traders speculated that further capacity cuts at mills will boost steel prices,” she said.

“We believe there is also some level of end of year buying by traders as they look to cover needs over the Lunar New Year holiday.”

Macquarie analysts remain bearish, like most following the sector closely, given the expected ramp up in supply from Rio, BHP, Roy Hill and Vale across the next two years and amid the risk of flatlining Chinese demand.

In its latest note, the Australian investment bank said an oversupply was present that would pressure prices through the year.

“We have been pointing to the clear oversupply in physical iron ore markets for the past couple of months,” Macquarie said.

“Higher iron ore prices over 2H16 have clearly resulted in a supply response, which meant that seaborne iron ore shipments for 2016 ended up being 70mt higher than our forecast at the start of the year.

“Pulling all the data together, we estimate that China’s iron ore market in 2016 was oversupplied by 72mt, with most visible in the higher inventories at ports and mills in 4Q16.”

Given the oversupply threat, the investment bank’s analysts see little reason to expect levels above $US80 a tonne to last much longer.

“We still believe our $US54/t price forecast for this year is fairly balanced, and clear downside remains from spot price levels near $US80/t.”