* Dalian coke stretches gains to hit highest since 2013
* Soaring coal prices boost demand for high-grade iron ore (Updates prices, adds Vale forecast on 2017 iron ore supply)
By Manolo Serapio Jr
MANILA, Oct 26 (Reuters) - Chinese iron ore futures rose for a third day running to their highest in more than two years on Wednesday as surging coal prices lifted demand for higher grade iron ore to boost efficiency and use less coal.
Coal shortages in China after government-led capacity cuts that shuttered many mines has spurred prices of the fuel, including coking coal and coke used in steelmaking.
"Coke is becoming very expensive and mills are now using more high-grade iron ore so they can be more efficient to reduce consumption of coke," said a Shanghai-based iron ore trader.
Iron ore for January delivery on the Dalian Commodity Exchange DCIOcv1 rose as much as 5.1 percent to 487.50 yuan ($72) a tonne, its strongest since August 2014, before closing at 474 yuan, up 2.2 percent.
January coke DCJcv1 rose 4.2 percent to end at 1,705 yuan per tonne, after touching 1,765 yuan earlier, its highest since August 2013. Coking coal DJMcv1 for the same month of delivery climbed as much as 4.5 percent to a contract high of 1,332 yuan, before closing nearly flat at 1,277.50 yuan.
"The iron ore market is becoming two-tiered. High grade ore is enjoying good demand while demand for mid- to low-grade is not that strong," the Shanghai trader said.
That has been forcing suppliers of low-grade iron ore from India and Iran to offer deep discounts to attract buyers. futures have lifted bids for physical iron ore cargoes, traders said, pushing the spot benchmark above $60 a tonne for the first time since August.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI jumped 4.9 percent to $61.60 a tonne on Tuesday, a level last seen on Aug. 23, according to data from The Steel Index.
Annual gains in iron ore prices, however, were much smaller compared to coking coal's. The spot iron ore benchmark has risen 43.6 percent this year while spot Australian premium hard coking coal .PHCC-AUS=SI has surged 214 percent to $245.50 a tonne on Tuesday.
Top iron ore miner Vale SA VALE5.SA expects 50 million tonnes of new iron ore production to enter the global market in 2017, but it should be offset by falling production in China and increased steel demand, a company executive said. = 6.7699 Chinese yuan)