Iron ore's latest rally comes after Shanghai rebar futures – the world's most traded steel contract – jumped to the highest level since March 2013 on Thursday reaching 4,016 yuan ($601) a tonne on Thursday.

Chinese traders are worried about a steel supply crunch as Beijing steps ups efforts to crack down on polluting plants. The country wants to cut output by as much as 50% during winter months.

In Hebei province, China's key producing region, steelmakers have until September 1 to comply with stringent new emissions regulations or would be shut down. Some 120 million tonnes of low-quality steel capacity were shuttered during the first six month of the year.

Beijing's policies to clean up and consolidate the domestic steel industry is playing into the hands of iron ore exporting countries with low grade furnaces – particularly those that use scrap – being forced out of business. Authorities are also clamping down on pollution from sintering plants, a necessary extra step when using low grade ore (domestic Chinese iron content averages only about 20%) to make steel.

A worry for the industry has been high stockpiles in China and inventories at the country's ports remain near all-time highs dipping to 139.2 million tonnes last week compared to the record set June 23 at 141.5 million tonnes according to Steelhome data. However, traders tell Reuters "steel producers are increasingly opting for higher grade iron ore to boost efficiency":

"There isn't a lot of high-grade around and Chinese mills are preferring high-grade because they want to produce more with steel prices rising," said a trader in Jinan in China's eastern Shandong province.