* Iron ore rally not fundamentally justified - Macquarie
* China punishes nearly 700 officials in environmental crackdown (Updates prices)
By Manolo Serapio Jr
MANILA, Dec 14 (Reuters) - Steel and iron ore futures in China retreated on Wednesday after a two-day run-up that lifted the industrial commodities to multi-year highs amid Beijing’s efforts to address overcapacity in its steel sector.
China has cut 88 million tonnes of steel capacity this year under an economic reform to slim down its glut-hit sectors, nearly double the target of 45 million tonnes and helping spur an 86 percent rally in steel futures this year.
Beijing’s environmental crackdown has also hit heavy polluters including mills, forcing them to reduce output or shut temporarily.
China has punished nearly 700 more regional officials for inadequately protecting the environment in the latest round of rolling inspections, the state news agency Xinhua reported.
The most-active rebar on the Shanghai Futures Exchange closed down 2.6 percent at 3,375 yuan ($489) a tonne. The construction steel product rose to its highest since April 2014 on Monday, hitting 3,557 yuan.
Iron ore on the Dalian Commodity Exchange dropped 4.8 percent to 605 yuan per tonne, after spiking to a nearly three-year high of 657 yuan on Monday.
“Since steel shutdowns have been one of the main drivers of the steel rally, in our view, we don’t think iron ore rallying is fundamentally justified, though it is clear that Chinese market participants disagree,” Macquarie analysts said in a note.
The retreat in steel prices also followed data on Tuesday showing that China’s crude steel output rose for a ninth straight month in November, suggesting that Beijing’s closure of excess capacity has not stopped mills from producing more to chase rising prices.
Iron ore for delivery to China’s Qingdao port .IO62-CNO=MB slipped 0.2 percent to $83.42 a tonne on Tuesday, a day after hitting its strongest level since October 2014, according to data from Metal Bulletin.
$1 = 6.9051 Chinese yuan Reporting by Manolo Serapio Jr.; Editing by Amrutha Gayathri