June 16, 2017 / 2:42 AM / 2 months ago

Shanghai steel extends gains on capacity cuts, but demand outlook shaky

* Dalian iron ore rises over 2 pct, tracking steel

* China curbs may cool steel demand from property market -analyst

By Manolo Serapio Jr

MANILA, June 16 (Reuters) - Chinese steel futures rose sharply for a third day in a row on Friday, supported by government efforts to tackle a glut, even as the outlook for demand in the world's top steel consumer may not be too promising, particularly from its property sector.

China said on Thursday that it had cut 42.4 million tonnes of steel capacity by end-May, representing 85 percent of its capacity reduction target this year.

The most-active rebar on the Shanghai Futures Exchange was up 2.1 percent at 3,145 yuan ($462) a tonne by 0214 GMT, adding to Thursday's nearly 4 percent spike.

The construction steel product has risen about 5 percent so far this week, on course for its biggest weekly increase in a month.

But Julius Baer analyst Carsten Menke said the outlook for steel demand from China's property sector is "not very promising" with state efforts to cool the market likely to reduce activity over the coming months.

China has been restricting real estate purchases across its cities to keep speculation in check and curb soaring prices, with banks also tightening loans to the sector.

"Adding to this, steel consumption is approaching the seasonal peak, which should lead to falling production over the coming months and weigh on the steel mills' demand for iron ore," Menke wrote in a note.

The strength in steel prices helped lift raw material iron ore, with the most-traded iron ore contract on the Dalian Commodity Exchange up 2.4 percent at 433 yuan per tonne.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB rose 1.5 percent to $55.23 a tonne on Thursday, according to Metal Bulletin.

The spot benchmark, which hit a one-year low on Tuesday, has gained 1.5 percent this week, following a three-week decline.

Menke said rising low-cost supply from top exporters Australia and Brazil should keep the iron ore market "in oversupply and prices should continue to slide over the coming months."

"As prices have returned to fundamentally justified levels faster than expected, we lower our 3- and 12-month targets to $55 and $50 per tonne. We maintain a cautious view on both iron ore and steel."

$1 = 6.8117 Chinese yuan Reporting by Manolo Serapio Jr.; Editing by Richard Pullin

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