* Rebar inventory at Chinese traders lowest since January
* China's steel sector needs to continue downsizing - CISA
By Manolo Serapio Jr
MANILA, April 25 (Reuters) - Chinese steel futures climbed as much as 2.1 percent on Tuesday, as the market moved off from last week's three-month low with falling steel stockpiles held by traders suggesting that demand remains firm.
The increase in steel prices came as a senior official of the China Iron and Steel Association (CISA) called for further cuts in the country's production capacity, saying the sector remains saturated despite increased profits in the first quarter.
"The whole industry needs to press ahead with cutting capacity and deleveraging," Gu Jianguo, CISA executive vice chairman, was quoted as saying on Monday by the official Xinhua News Agency.
The most active rebar future on the Shanghai Futures Exchange was up 1.7 percent at 2,944 yuan ($428) a tonne by 0300 GMT after earlier climbing to 2,955 yuan. The construction steel product hit 2,775 yuan on Thursday, its weakest since Jan. 9.
Inventories of rebar held by Chinese traders reached 5.95 million tonnes as of April 21, the lowest since late January, according to data tracked by SteelHome. SH-TOT-RBARINV
"Long steel product inventory dropped at distributors, indicating increasing construction demand," Morgan Stanley said in a note.
CISA said its member companies posted a combined profit of 23.3 billion yuan ($3.38 billion) in the January to March period, compared with a year-ago loss of 8.75 billion yuan.
A surge in steel prices spurred Chinese mills to ramp up output in the first quarter, with crude steel production hitting a record 72 million tonnes in March.
Raw materials iron ore and coking coal pared losses, thanks to steel's advance. Iron ore on the Dalian Commodity Exchange was off 0.3 percent at 497 yuan a tonne after falling as low as 489.50 yuan. Coking coal was down 0.6 percent at 1,095.50 yuan, off a session trough of 1,076 yuan.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB dropped 2.5 percent to $66.53 a tonne on Monday, according to Metal Bulletin.
ANZ commodity strategist Daniel Hynes believes the recent selloff in iron ore was overdone, reiterating he sees the price ranging between $70 and $80 a tonne in the short term.
"The market's relatively balanced now and we need to some degree domestic Chinese iron ore to remain in the market to keep that balance," he said. ($1 = 6.8838 Chinese yuan) (Reporting by Manolo Serapio Jr.; Editing by Christian Schmollinger)