Shanghai steel hits 1-wk low on lean demand, drags iron ore

* Shanghai rebar down for third straight day

* Iron ore stocks at China ports hit record high

MANILA, March 6 (Reuters) - Shanghai steel futures fell for a third session in a row on Tuesday, hitting a one-week low amid tepid Chinese demand and dragging down prices of raw material iron ore to the weakest in a month.

Construction activity in China is only resuming gradually after the Lunar New Year holiday last month “so the increase in steel stocks in the past two weeks was quite fast,” said Cao Ying, analyst at SDIC Essence Futures.

Stocks of construction steel product rebar among Chinese traders reached 7.13 million tonnes on Feb. 23, the most since March last year, data compiled by SteelHome consultancy showed. SH-TOT-RBARINV

The most-actively traded rebar contract on the Shanghai Futures Exchange was down 0.5 percent at 3,962 yuan ($625) a tonne by 0215 GMT. It fell to 3,919 yuan earlier, its lowest since Feb. 23.

“We expect demand to recover from next week. In some cities, real estate is also booming and property inventory has come down,” said Cao.

China’s plan to cut capacity in its steel sector by a further 30 million tonnes this year should also support prices, she said.

The plan will bring the total reduction in steel capacity over three years to 145 million tonnes. That will put China well ahead of a plan to reduce excess by up to 150 million tonnes by 2018 to 2020.

The planned steel capacity reduction “is a little more than we expected,” said Cao. “Along with China’s environment campaign that should last all of this year, that may limit steel supply and prices may remain high the whole year,” she said.

The most-traded May iron ore on the Dalian Commodity Exchange fell as far as 516.50 yuan a tonne, its lowest since Feb. 6, and was last down 1.5 percent at 521.50 yuan.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB slid 1.7 percent to $77.03 a tonne on Monday, according to Metal Bulletin.

Stocks of iron ore at China's major ports reached a record high 159.1 million tonnes on March 2, SteelHome data showed. SH-TOT-IRONINV ($1 = 6.3373 Chinese yuan) (Reporting by Manolo Serapio Jr.; editing by Richard Pullin)