UPDATE 1-Chinese steel futures fall for a second day on soft demand

* Steel demand set to warm in late March

* China aims to cut about 30 mln T of steel capacity this year

* Weaker steel prices weigh down on raw materials

* Iron ore falls more than 3 pct (Updates closing prices, adds iron ore port inventories and comment)

SHANGHAI, March 5 (Reuters) - Chinese steel prices dropped for the second straight session to the lowest in a week on Monday as demand remained subdued, dragging down the key steelmaking raw material iron ore more than 3 percent.

Steel demand has remained weak since the Lunar New Year holiday in late February and is likely to recover gradually from mid-March. That is limiting gains in steel prices made over the past few sessions on expectations for more government-mandated output curbs this year.

“The previous gains were mainly driven by the expectation that output curbs in Tangshan could spread to other northern regions, lifting market sentiment and prices, but demand hasn’t recovered yet, so prices lost support,” said Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen.

“If demand fails to pick up quickly in late March, we might see prices entering a downward trend.”

The most active rebar on the Shanghai Futures Exchange fell to a session low of 3,948 yuan ($623.08) a tonne, the lowest since Feb. 26. It was down 1.3 percent at 3,957 yuan a tonne by close.

China will cut about 30 million tonnes of steel capacity this year, the National Development and Reform Commission said on Monday, putting the country on track to beat its long-term targets as the government pledged to defend its “blue skies”.

Zhao expected Chinese steel mills to be more experienced in maximising output by using more scrap and electric arc furnaces with lower emission.

China aims to expand its economy by around 6.5 percent this year, the same goal as in 2017 even though the economy grew 6.9 percent last year. This suggests that Beijing is keeping its focus on reducing risks to the financial system from a rapid build-up in debt.

Iron ore on the Dalian Commodity Exchange tumbled 3.6 percent to end at 520 yuan a tonne.

“Iron ore has the worst fundamental among the whole steel production chain due to ample supplies and record high port inventories. So when steel prices go weak, iron ore is hit the most,” said a research manager at a trading firm in Hangzhou.

Iron ore inventories at main ports stood at a record high of 155.88 million tonnes by Feb. 23, Steelhome data showed.

Coke slumped 2.5 percent to 2,177 yuan a tonne and coking coal declined 0.6 percent to 1,374.50 yuan a tonne.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB fell $1.05 to $78.34 a tonne last Friday, according to Metal Bulletin. ($1 = 6.3318 Chinese yuan) (Reporting by Ruby Lian and Josephine Mason; Editing by Christian Schmollinger and Amrutha Gayathri)