SINGAPORE, Feb 6 (Reuters) - Iron ore may extend modest gains this week as more Chinese steel producers return to the spot market to stock up, but a sluggish domestic steel market is likely to cap any gains in price.
Chinese steel prices have been largely steady so far this year with activity in the domestic construction sector, a heavy steel user, yet to fully resume.
"Construction activity is still low because it's still winter in the northern part of China and we only expect steel demand to return later this month or in March," said a Shanghai-based iron ore trader.
Mirae Asset Securities said it was keeping its "underweight" stance on China's steel sector this year, particularly the large state-owned steel mills.
"The structural driver of steel demand - urbanization - remains a valid long-term call, but it may halt in 2012 if the central government continues its crackdown on house prices," the brokerage said in a note.
China's slack steel demand meant a slow start for iron ore this year, which gained a modest 3.5 percent versus a more than 12 percent rise for copper, another key construction material.
The most-traded May rebar contract on the Shanghai Futures Exchange has risen 3 percent so far this year, closing nearly flat at 4,330 yuan ($690) a tonne on Monday.
Iron ore with 62 percent iron content .IO62-CNI=SI rose 0.1 percent to $143.30 a tonne on Friday, according to the Steel Index, its highest level since Nov. 22.
"Iron ore prices could rise further this week with some more mills going back to the market and traders taking positions," said the Shanghai trader.
Offer prices for Australian ore in China rose by at least a dollar on Monday, with 61.5-grade Pilbara iron ore fines quoted at $142-$144 a tonne, cost and freight, and 58-grade Yandi fines at $130-$132, said industry consultancy Umetal.
Indian 63.5/63-grade fines were offered at $148-$151 a tonne, up $2 from Friday, said Umetal.
Traders are eyeing another tender by global miner BHP Billiton due to close later on Monday, particularly with prices moving higher at recent tenders.
BHP last sold Yandi fines at $130.5 a tonne, C&F on Friday, up from $130 on Thursday, traders said.
But a sizeable amount of iron ore at Chinese ports, which is readily available and which buyers can buy in smaller tonnages unlike fresh spot cargoes, may limit appetite for more imports, traders said.
Stockpiles of imported iron ore at major Chinese ports reached 101.49 million tonnes last week, with shipments from the three biggest exporters -- Australia, Brazil and India -- rising, Chinese consultancy Mysteel said on Friday.