* Shanghai rebar, Dalian iron ore surge 6 pct to hit upside limit
* Rebar highest since Feb 2015, Dalian ore highest since Oct 2014
* BHP cuts 2016 iron ore production guidance by 10 mln T (Updates prices)
By Manolo Serapio Jr
MANILA, April 20 (Reuters) - Chinese steel futures stretched big gains to a third day on Wednesday, surging 6 percent to hit their upside limit, as traders restocked on the building material betting demand will stay strong in the months ahead.
Steel's rally lifted the spot price of raw material iron ore back above $60 a tonne for the first time in six weeks and firmer iron ore futures on Wednesday suggested further increases for physical prices.
"This is out of my expectation," said a Shanghai-based trader. "It seems that many, many people are betting that demand would get better in the next few months and a lot of steel traders are now restocking."
The most-traded rebar, a construction steel product, on the Shanghai Futures Exchange SRBcv1 surged 6 percent to close at its exchange-set ceiling of 2,592 yuan ($401) a tonne, the strongest since Feb. 27, 2015.
It was the second straight day that the contract hit its upside limit.
The pickup in steel demand is largely seasonal, according to traders and analysts, as warmer weather typically lifts construction activity.
But the price rise this year has been quite rapid because the market was caught with low steel stocks following shutdowns of some Chinese plants in the past year on weak demand. Signs of recovery in China's property sector also aided sentiment.
Stocks of rebar at 28 large Chinese cities stood at 4.65 million tonnes as of April 15 SH-TOT-RBARINV , the lowest since late January, according to data tracked by consultancy SteelHome.
Buying interest for spot iron ore cargoes was also firm, though not as brisk as in the steel market, traders said.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI climbed 3.2 percent to $61.80 a tonne on Tuesday, the highest since March 8, according to The Steel Index.
Iron ore futures extended gains on Wednesday. The most-traded September iron ore on the Dalian Commodity Exchange DCIOcv1 also rose 6 percent to close at its upside limit of 454.50 yuan a tonne, its loftiest since Oct. 15, 2014.
On the Singapore Exchange, June iron ore SZZFM6 climbed 4.8 percent to $60.38 a tonne by 0822 GMT.
High inventories of iron ore at China's ports may cap any further increases in iron ore prices, said Commonwealth Bank of Australia analyst Vivek Dhar.
Stocks of imported iron ore at China's ports stood at 96.8 million tonnes as of April 15 SH-TOT-IRONINV , not far below a one-year high of 97.85 million tonnes hit the week before, based on SteelHome data.
"Near-term restocking demand is also expected to be subdued with several steel mills reporting sufficient iron ore stockpiles," Dhar wrote in a note.
BHP Billiton BHP.AX BLT.L cut its fiscal 2016 iron ore production guidance by 10 million tonnes to 260 million tonnes due to bad weather and rail maintenance, further reducing shipments into an oversupplied global market. ($1 = 6.4634 Chinese yuan)