Spot iron ore prices rose to the highest since February as firmer steel demand encouraged Chinese mills to restock, helping the raw material recover nearly 13 percent from last month's rout.
China's pledge to speed up spending on railway projects to aid a slowing economy has fueled recent gains in steel prices in the world's biggest consumer of the alloy along with a seasonal pickup in demand.
China's national railway operator will raise its annual investment by 20 billion yuan ($3.2 billion) to 720 billion yuan in 2014 to increase the number of lines it plans to build.
"Mills have more incentive now to sustain their production so they're buying more raw material," said a Shanghai-based iron ore trader.
Iron ore for immediate delivery to China .IO62-CNI=SI rose 0.9 percent to $118.20 a tonne on Tuesday, the highest since Feb. 25, based on data from compiler Steel Index. The price has risen 12.9 percent since hitting a 17-month low in early March.
That was the fourth day in a row that the benchmark 62-percent grade price increased and it may stretch to a fifth with some physical cargoes sold at stronger levels on Wednesday.
Global miner Rio Tinto Ltd sold a 190,000-tonne cargo of 61-percent grade Australian Pilbara iron ore fines at $120.30 a tonne on the globalORE platform for delivery to China in May, traders said.
That was up from a sale for the same iron ore grade at $117.50 per tonne on Tuesday, they said.
China's crude steel output remained well above 2 million tonnes a day on average in late March, even as the rate slipped to 2.073 million tonnes from 2.096 million tonnes in the middle of the month, according to estimates from the China Iron and Steel Association.
The daily pace averaged at 2.097 million tonnes in the first 10 days of March, the highest since mid-November.
Some Chinese steel mills are looking for high-grade cargoes for which spot supply is relatively tight, the Shanghai trader said.
"But I'm still relatively cautious on whether the (benchmark) price can go beyond $120 because we're still looking forward to huge supply later this year," he said.
Morgan Stanley sees global seaborne iron ore supply exceeding demand by 79 million tonnes this year, and doubling to 158 million tonnes in 2015.
"Although current market conditions remain relatively balanced, supply growth will begin to outpace global demand growth as the year progresses," Morgan Stanley said in an April 8 report.
The most-active rebar for October delivery on the Shanghai Futures Exchange slipped 0.6 percent to settle at 3,384 yuan a tonne, after touching a one-month peak of 3,425 yuan on Tuesday.
Despite the drop, rebar - used to reinforce concrete in buildings - has recovered almost 8 percent from a record low of 3,141 yuan reached last month.
Iron ore for delivery in September on the Dalian Commodity Exchange was off 0.2 percent at 819 yuan per tonne, after hitting a six-week high of 833 yuan in the previous session.