* Steelmaking profits grow after some capacity closed in H1
* That boosts appetite for raw ingredient iron ore
* Scrap steel gets more expensive, buoying demand for iron ore
BEIJING, July 10 (Reuters) - China's iron ore futures climbed for a second session on Monday, rising nearly 2.8 percent as profits grow on churning out steel.
"(Iron ore) stocks piled in steel mills rose to 25 days from 21 days as the market believes prices for raw materials are undervalued amid big profits on steel production," said Wang Yilin, an analyst at Sinosteel Futures.
China, the world's largest steel producer, eliminated about 120 million tonnes of low-grade steel capacity in the first half of this year. Analysts said the move helps increase profit margins at mills, enticing them to expand steel output. Meanwhile, domestic prices for scrap steel climbed to 1,800 yuan ($264.67) a tonne on Friday, up more than 20 percent from the year's lows in May and June. That could potentially encourage a shift away from using recycled steel, boosting appetite for raw ingredient iron ore. "Since the price advantage on scrap is less obvious, with the price gap between scrap and pig iron narrowed to 500 yuan a tonne from 1,000 yuan, mills are turning back to iron ore," said Wang.
The most-traded iron ore on the Dalian Commodity Exchange had risen 2.22 percent to 483 yuan per tonne by mid day, after earlier touching 485.5 yuan a tonne.
Iron ore for immediate delivery on Friday gained 1.4 percent to $62.80 a tonne, according to Metal Bulletin.
Stockpiles of imported iron ore at ports had dropped to 139.3 million tonnes by Monday, just below the record level of 141.5 million tonnes two weeks ago.
The most-active construction steel rebar on the Shanghai Futures Exchange climbed 2.18 percent to 3,461 yuan a tonne. The contract has gained nearly 30 percent this year.
The relative strength index, a key technical indicator, showed that the rebar market had once again broken above 70 after it fell back on Friday, suggesting it has been overbought.
China's producer price index (PPI) rose 5.5 percent in June from a year earlier, with the section of the index for ferrous metals climbing 24.5 percent, according to data from National Bureau of Statistics on Monday. "Despite flat demand in summer, high prices on rebar are supported by tight rebar supply and low-level of inventory," said Wang.
Stocks of rebar held by Chinese traders had climbed 790,000 tonnes to 373.5 million tonnes by Monday, just above a six-month low hit in early June, data compiled by SteelHome showed.
Iron ore shipments to China from Australia's Port Hedland terminal dropped to 36.6 million tonnes in June from 38 million tonnes the month before. ($1 = 6.8010 Chinese yuan renminbi)
(Reporting by Muyu Xu and Beijing Newsroom; Editing by Joseph Radford)