* China iron ore, steel futures retreat after recent sharp gains
* Iron ore stockpiles at China ports highest since December 2014 (Adds China iron ore port stocks, updates prices)
By Manolo Serapio Jr
MANILA, July 29 (Reuters) - Iron ore scaled a 12-week high near $60 a tonne and is set to end July with a second monthly gain on the back of a stronger Chinese steel market that benefited from tighter supply.
The spike in the spot price of the steelmaking raw material was largely driven by big gains in China's ferrous futures this week, defying market expectations that iron ore would be hurt by increased supply in the second half of the year. ore prices have advanced as higher steel prices have encouraged stronger steel output and iron ore consumption," Commonwealth Bank of Australia analyst Vivek Dhar said.
Floods in northern China have disrupted steel transport routes, while Tangshan, a major steel producing region, continues to curb steel production on environmental grounds, pushing up steel prices, Dhar said in a note.
Chinese authorities are also conducting environmental inspections on steel mills across eight provinces that have led to closures of some facilities, traders and analysts say.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI jumped 2.1 percent to $59.20 a tonne on Thursday, according to the latest available data compiled by The Steel Index (TSI).
That was the highest since May 5 and brought the commodity's July gain so far to 9.2 percent, nearly matching June's rise.
"The seaborne iron ore market remained tight, with sellers reluctant to let go of cargo in anticipation of further gains, and buyers also taking a wait-and-see approach," TSI said.
The price increase followed sharp gains in Chinese iron ore futures, which touched a three-month peak on Friday, before retreating.
The most-traded September iron ore contract on the Dalian Commodity Exchange DCIOcv1 hit 477 yuan ($72) a tonne, its strongest since April 25, before closing down 1.6 percent at 461 yuan.
"The mills are enjoying higher profit from steel products at the moment and some are increasing their production rate. Some are even considering using (higher quality) iron ore pellets to improve output," said a Shanghai-based trader.
On the Shanghai Futures Exchange, construction steel product rebar SRBcv1 dropped 2 percent to end at 2,412 yuan per tonne, having touched a 1-1/2-week high of 2,503 yuan on Thursday.
Stocks of imported iron ore at China's ports remained high, standing at 106.05 million tonnes on Friday, the most since December 2014, according to data tracked by SteelHome consultancy. SH-TOT-IRONINV ($1 = 6.6485 Chinese yuan)