* Iron ore prices highest since Aug. 27, 2014
* Steel prices extend gains
* Iron ore inventories at ports rise to highest in two years
SHANGHAI, Aug 23 (Reuters) - Chinese iron ore futures rose to their highest in two years, as steel mills in the world's top producer restocked the raw material.
The most-active benchmark iron ore future on the Dalian Commodity Exchange DCIOcv1 climbed as high as 2.7 percent to 457 yuan ($68.77) a tonne, its highest since Aug. 27, 2014. It was 2.1 percent higher at 454.5 yuan a tonne by 0254 GMT.
"Generally speaking, steel fundamentals are strong, and mills are making a big profit and restocking iron ore, " said Yu Yang, an analyst with Shenyin & Wanguo Futures in Shanghai.
The supplies at Chinese ports climbed to 108.46 million tonnes by Aug. 22, up from 107.41 million tonnes a week ago, and 32 percent higher than a year ago, according to data from industry website Custeel.com. The inventories are now at their highest since August 2014. CUS-STKTOT-IORE
China has vowed to increase capacity cuts in its bloated steel sector and has sent inspection teams to supervise the results. The government is expected to continue large infrastructure spending, raising hopes that demand will climb and support steel prices.
The most-traded January rebar, a construction steel product, on the Shanghai Futures Exchange SRBcv1 rose 0.7 percent at 2,588 yuan a tonne at 0254 GMT.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI edged up to $61.10 a tonne on Monday, 10 cents higher from the previous session, according to The Steel Index.
($1 = 6.6456 Chinese yuan renminbi)