Iron ore prices climbed to their highest in a month as a firmer steel market in top consumer China helped ease cash flow worries among mills, prodding them to buy the raw material.
Iron ore has recovered more than 12 percent since falling to a 17-month low of $104.70 a tonne in early March, but further gains depend on whether Chinese steel demand picks up even more during the seasonally strong month of April and May.
Stocks of steel products held by traders in China have been dropping over the past four weeks. The inventory fell to 19.27 million tonnes last week from 19.73 million tonnes the previous week, according to data from industry consultancy Mysteel.
"Demand for steel products is getting better so mills have money to buy cargo and not rely on banks given the tight credit conditions," said an iron ore trader in China's eastern Shandong province.
Iron ore for immediate delivery to China .IO62-CNI=SI rose 0.7 percent to $117.60 a tonne on Tuesday, the highest since March 3, according to data compiled by Steel Index.
"But I think the cost of the raw material is increasing faster than steel prices so I'm not sure if the gains will be sustained," the trader said.
The trader is looking to purchase a 170,000 tonne cargo of 56.5 percent grade Australian iron ore fines for delivery this month, but has found the prices offered too high, he said.
Iron ore has increased nearly 5 percent over the past two days after surging by 4 percent on Monday. In comparison, Shanghai rebar futures have only risen by about 1.2 percent so far this week.
On Wednesday, the most-traded rebar for October delivery on the Shanghai Futures Exchange surrendered early gains to finish down 0.3 percent at 3,317 yuan a tonne.
Dalian iron ore futures, which have risen along with spot iron ore prices, also came off on Wednesday after a six-day rally. The most-active September iron ore contract on the Dalian Commodity Exchange fell 1.3 percent to 784 yuan per tonne.
Some prospective buyers of iron ore in the spot market were hesitant to bid aggressively for cargoes amid continuing signs of weakness in China's economy.
Two surveys on Tuesday showed that China's manufacturing sector struggled in March, with activity at smaller, private firms contracting for a third month while those at bigger companies improved only marginally.
China's Premier Li Keqiang last week vowed the government was ready to support the cooling economy, saying the government had the necessary policies in place and would push ahead with infrastructure investment.