Chinese iron ore futures pulled back from a three-year high on Tuesday as steel prices retreated after gaining 13 per cent so far this month on Beijing's renewed push to slim down a bloated industry.

But expectations that China will continue to reduce excess steel capacity could keep prices of the metal elevated, spurring mills to replenish stocks of raw materials including iron ore.

The most-traded iron ore on the Dalian Commodity Exchange jumped more than 4 per cent to hit an intraday peak of 664.50 yuan ($US96) a tonne, its strongest since December 2013. It later trimmed gains to close at 638 yuan, up 0.2 per cent.

Rebar on the Shanghai Futures Exchange dropped 1 per cent to end at 3284 yuan a tonne, after initially gaining as much as 2.5 per cent.

Higher steel prices have increased the profitability of Chinese mills significantly and "that's certainly given them confidence to restock raw materials such as iron ore", said Daniel Hynes, commodity strategist at ANZ.

Monday's spike in iron ore futures helped lift spot prices to their highest in more than two years, with some traders building up steel inventories on expectations of further price increases.

"It's driven by steel mills and traders and certainly there's expectation within that market of further capacity cuts" that could push steel prices higher, said Hynes.

"At the same time they are seeing relatively solid growth in demand from a variety of infrastructure programs that the (Chinese) government has implemented or boosted spending in over the past few months."

Iron ore for delivery to China's Qingdao port slid 2.5 per cent to $US81.55 a tonne, according to Metal Bulletin.

It was the highest for the spot benchmark since October 2014 and followed a 7 per cent surge to a three-year high in Dalian iron ore futures on Monday.

Both steel and iron ore futures posted their best week since November last week after China said it would shut down production of low-grade steel products by end-June, its boldest effort yet to tackle overcapacity and pollution.

Rio Tinto shipped less iron ore in 2016 than originally forecast, but the outcome will be of little surprise to the market.