Iron ore spot prices for delivery into China rose to $94-$95 a metric ton Friday, according to Metal Bulletin data, continuing a rally since mid-April as China posts record steel output levels.

Driven by government spending on infrastructure and related sectors as part of Beijing's CNY4 trillion stimulus package, China's crude steel output rose 6% on year to a record 49.4 million tons in June, as macroeconomic and financial indicators continue to indicate the country is sustaining a construction boom that bodes well for steel products.

"The main reason is that the steel market has been steadily rising since April, and we've had about three months of increasing output," said Yu Liangui, a senior analyst with steel consultancy Mysteel.

The rise in iron ore spot prices, with the 63.5% grade reaching a year's high earlier this week when it breached $90/ton, began in mid-April, closely tracks China's steel output and the fortunes of Chinese mills, which began to turn profitable in May for the first time in eight months.

Steel prices in China rose 3.9% on month in June and 2.7% on month in May, according to China Iron and Steel Association data. July data aren't yet available, but major steelmakers Baosteel Group Corp. and Jiangsu Shagang Group, among many others, have continued to raise prices, often well beyond market expectations.

China's iron ore stockpiles at major ports have also been slightly falling despite a string of record iron ore imports this year, currently around 68 million tons, down from 71 million tons in May.

Spot ore prices have risen despite China's larger steel mills putting in place provisional pricing arrangements for their contract shipments, as negotiations stall over a final national term price for contract ore. Provisional pricing are temporary discounts provided while mills and ore suppliers haggle over a final annual rate.

"Spot and contract are actually two different systems," Yu said. "The spot market was always an addition to contract ore."

Contract ore provides about 40% of China' imported ore supply, while spot ore provides the rest, Yu said.

Even as mills spar with global iron ore miners over this year's contract price, these steelmakers have always enjoyed some form of discount over the spot market.

"The larger mills generally have access to their own long-term supply of ore at discounted prices," said Xie Zhaowei, a steel analyst for Great Wall Futures. "The spot market is used more by medium-sized and smaller firms."

Compared with larger mills, a lot of other steel users don't have long-term discount deals and have to go to the spot market for their needs, Xie said.

With Chinese steel output backed by newly buoyant auto and real estate sectors, miners have continued to meet rising demand.

Anglo-Australian suppliers BHP Billiton Ltd. (BHP.AU) and Rio Tinto PLC (RTP) both booked iron ore vessels on the Australia-China route this week, despite media reports suggesting the two mining companies have slowed or suspended shipments after a diplomatic dispute over China's arrest of four Rio Tinto employees on suspicion of espionage.

"Freight rates are looking well supported for the rest of the year," said a Singapore-based forward freight agreement broker.

For now, spot ore prices appear set to retain upside on steel consumption's bullish prospects in the second half of the year, analysts said.

But if ore supply sharply rises, it may dent the rally, they said.

"We're going to see more domestic mines coming back online, the more iron ore market prices rise," Yu said.

In recent years, global miners have also invested in new supply projects that have fed steadily expanding annual shipments.

Brazilian miner Vale S.A. (VALE), for example, invested around $7 billion this year in new supply projects, on top of around $9 billion last year, Yu said. "These projects are going to kick off next year," adding supply pressure to prices.

-By Chuin-Wei Yap, Dow Jones Newswires; 8610 6588 5848; chuin-wei.yap@dowjones.com

(James Campbell in Singapore contributed to this story.)