Iron ore swaps premium over spot widens on China restocking bet

* Mills likely to replenish when China returns next week

* Vale halts output at 3 Brazil iron ore pellet plants

By Manolo Serapio Jr

SINGAPORE, Oct 5 (Reuters) - Bids for iron ore forward swaps remained firm on Friday, reflecting investor expectations spot iron prices will bounce back as Chinese steel mills replenish inventories when they return next week.

The premium of swap prices over spot has widened this week, although the absence of Chinese traders due to the National Day holiday limited trading volumes on the cash-settled derivatives, with physical markets grinding to a halt.

The November iron ore swap contract

climbed 2.5 percent to $111.42 a tonne on Thursday, and December

jumped by around the same amount to $111.58, with other further forward contracts

also extending recent gains.

On Thursday, the average bid for the fourth-quarter swaps was at $112.50, traders said, above Thursday's average settlement of $111.31.

The prices are well above the benchmark spot rate of $104.20 a tonne for 62-percent grade iron ore

, where it was stranded for a seventh straight day on Thursday, with China's holiday silencing physical markets.

"People are betting that the Chinese will restock next week so we've seen some activity in swaps," said a Singapore-based trader.

The thin volumes, however, may have also helped exaggerate price gains, he said.

Volume cleared by the Singapore Exchange - which clears the bulk of cash-settled iron ore swaps traded globally - increased to 812 lots, or 406,000 tonnes, on Thursday from 322 lots on Wednesday.

Last month, the amount of swaps cleared by the Singapore Exchange peaked at nearly 4,000 lots on a daily basis, based on exchange data.

Iron ore hit a three-year low of $86.70 in September and while prices have since rebounded to above $100, they have struggled to go much higher in the face of poor steel demand in China, the world's biggest consumer.

Responding to slower global steel demand, Brazil's Vale

, the world's top iron ore miner, said on Thursday that it plans to suspend operations at three Brazilian iron ore pellet plants and increase output of lower-value mine products.

Iron ore indexes Last Change Pct Change PLATTS 62 PCT INDEX 107 +0.00 +0.00 THE STEEL INDEX 62 PCT INDEX 104.2 +0.00 +0.00 METAL BULLETIN INDEX 106.46 +0.00 +0.00

Index in dollars/tonne, show close for the previous trading day

(Editing by Miral Fahmy)

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