The price of iron ore on Monday continued its fight back from seven-month lows hit last week, as Chinese stockpiles and imports continue to grow rapidly.

The benchmark CFR import price of 62% iron ore fines at China's Tianjin port jumped 1% to $124.40 a tonne, the best level in almost a month after bouncing off the crucial $120 price point last week.

The steelmaking raw material remains down 7.3% since the start of the year according to data supplied by The Steel Index (TSI). Iron ore averaged $135 last year.

China's steelmakers imported a record 86.84 million tonnes in January, up 18% on December and more than 21 million tonnes higher than January 2013.

China now consumes some 70% of the global seaborne iron ore trade which for 2013 is estimated at just over 1.1 billion tonnes after a 10% jump to a record 820 million tonnes last year.

But with steel output slowing to just over 2 million tonnes per day from last year's torrid pace which hit 2.2mtpd, stockpiles at the country major ports also grew, topping 100 million tonnes for the first time in 18 months.

Part of the reason for high inventories and imports, is that high quality ore from Australia, Brazil and South Africa is edging out domestic Chinese supply as steelmakers cut down on cost and comply with new air pollution standards.

$120 a tonne has long been considered a price floor for iron ore as many of China's hundreds of small scale miners, which struggle with high costs and very low iron content, quickly become unprofitable at these levels.

The domestic industry last year produced 1.4 billion tonnes, but the bulk of the fines requires a process called sintering before being fed into blast furnaces which adds to the environmental impact and costs.

Premiums for high-quality lump  and pellets over fines have reached as much as $17–$18 a tonne and $42 a tonne respectively according to Metal Bulletin.

BHP Billiton, world number three producer after Vale and Rio Tinto, today announced record production at its Western Australian operations of 108 million tonnes, a 19% jump from a year earlier and on target for 192 million tonnes for the year.

The world's largest diversified miner, also see benefits from China's move away from low-quality supply and "increasing mill utilisation rates and the continued closure of sinter capacity, both of which are associated with more demanding environmental regulations within China, should support a preference for high quality lump iron units."

Longer term however, China's increased demand for high-quality ore would not be enough to meet increasing supply. Most analysts predict a further decline in the price of iron ore this year as Australian and Brazilian miners ramp up production.

Rio Tinto's output in its most recent quarter rose 7% and the Anglo-Australian giant is forecasting 2014 production of 295 million tonnes as it narrows the gap with Brazil's Vale which is expecting to mine 312 million tonnes in 2014.

A surplus of as much as 94 million tonnes is forecast for the year, but in a recent interview Rio's boss, Sam Walsh said it could turn out to be "less than half that"

A surplus of as much as 94 million tonnes is forecast for the year, but in a recent interview Rio's boss, Sam Walsh said it could turn out to be "less than half that" reports the FT :

While the "numbers" showed the market "trending to a surplus", Mr Walsh said a number of factors were likely to impact supply, including weather events in Australia and Brazil and some of the new capacity not coming on as "strongly" as expected.

"The best way of describing it [the market], is steady as she goes. It’s not something we are overly worried about," he said. "But clearly as we bring on expansions we do have the
ability to match those to the market."

BHP Billiton's comments on its latest results also predicts a more balanced market with "substantial new supply from the high quality, low cost basins of Western Australia and Brazil expected to exceed demand growth."