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UPDATE 1-Iron ore, Shanghai steel near 2-month peak as demand revives

* Firmer China steel prices, restocking lift iron ore

* BHP to cut iron ore jobs as demand slowdown bites

(Updates rebar price) By Manolo Serapio Jr

SINGAPORE, Oct 9 (Reuters) - Spot iron ore prices climbed to their highest in almost two months as steel mills from top buyer China snapped up cargoes to replenish stockpiles, encouraged by higher steel prices which also hit their loftiest since August.

Miners were gradually increasing offers of iron ore cargoes in the spot market on Tuesday as more and more Chinese buyers return after last week's public holiday, although traders say some buyers could soon recoil if prices rise too fast.

"Overall sentiment has been a lot better with the Chinese returning this week," said Jamie Pearce, head of iron ore brokering at SSY Futures, part of the shipbroking group Simpson Spence and Young.

"We have seen Chinese mills bidding high numbers on physicals to try and secure cargoes," said Pearce, adding that the Chinese were also the main buyers of iron ore forward swaps so far this week.

Benchmark iron ore with 62 percent iron content

surged almost 6 percent to $110.40 a tonne on Monday, the highest since Aug. 16, according to data provider Steel Index.

It was the biggest single-day gain since early September for iron ore which did not move last week during China's national holiday.

Iron ore prices have recovered from a three-year low of $86.70 a tonne hit in September, but remain 26 percent below this year's peak.

The upward momentum looks likely to continue, with sellers lifting price offers for imported cargoes to China by as much as $6 per tonne on Tuesday, traders said.

More cargoes are also on offer after prices spiked at Monday's sale tenders by miners Vale

and BHP Billiton , traders said.

Brazil's Vale, the world's top iron ore exporter, sold a 65-percent grade cargo at $125 a tonne, including freight, up from a previous deal of about $116, said a trader in Shanghai.

Third-ranked BHP Billiton sold 57.7-percent grade Yandi iron ore fines at $106.65 per tonne, he said, versus $99.50 before the Chinese holiday.

BHP Billiton is selling another 190,000-tonne of Yandi fines on Tuesday, while Vale is offering 150,000 tonnes of 63.2-percent grade material and Rio Tinto

is

selling 165,000 tonnes of 61-percent grade Pilbara iron ore fines, traders said.

BHP CUTS JOBS

Pearce said there is a chance iron ore prices can sustain the price gains given the relatively modest amount of material on offer against Chinese demand.

"There has been lack of physical cargoes on offer recently, so you will see mills paying a premium to secure physical cargoes which will give it upwards momentum. But I think we will see some resistance though when we get around the $120 levels," he said.

Firmer steel prices in China which suggest buyers are either seeing a pickup in demand or hoping for one, could support further gains in iron ore.

The most active rebar contract for January delivery on the Shanghai Futures Exchange

hit a session high of 3,686 yuan ($590) a tonne on Tuesday, a level unseen since Aug. 15. It closed up 0.3 percent at 3,667 yuan.

Some traders with iron ore cargoes in hand are withholding offers, the Steel Index said, suggesting some are waiting for prices to rise further to boost returns that in recent months have been wiped out at some trading firms as prices slid after Chinese demand cooled.

Battling weaker demand and higher costs, BHP Billiton said it plans to shed an undisclosed number of jobs in iron ore, its most profitable business.

BHP employs just under 6,000 people in its iron ore unit, out of more than 46,000 in the company worldwide excluding contractors. Rivals Rio Tinto and Xstrata have both announced job cuts at their Australian operations over the past month.

Shanghai rebar futures and iron ore indexes at 0722 GMT

Contract Last Change Pct Change SHFE REBAR JAN3 3667 +11.00 +0.30 PLATTS 62 PCT INDEX 112.5 +5.50 +5.14 THE STEEL INDEX 62 PCT INDEX 110.4 +6.20 +5.95 METAL BULLETIN INDEX 115.42 +8.96 +8.42 Rebar in yuan/tonne

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

($1 = 6.2872 Chinese yuan) (Editing by Himani Sarkar)

((manolo.serapio@thomsonreuters.com)(+65 6870 3884)(Reuters Messaging: manolo.serapio.reuters.com@reuters.net))

Keywords: MARKETS IRONORE/