* Retreat in iron ore futures follows spike to 8-week high
* Hot weather may slow construction activity in China -trader (Update closing prices)
By Manolo Serapio Jr
MANILA, May 16 (Reuters) - Chinese steel and iron ore futures erased gains on Wednesday following a three-day rally that lifted the raw material to an eight-week high, although the outlook for steel demand remained upbeat.
With construction activity in China in full swing, traders’ steel inventories have continuously fallen since March and production by Chinese mills jumped in April to the highest daily average in four years.
“It’s still the best season for steel demand in China and it could continue until early July or when summer officially begins. Now a lot of work sites have been busy,” said a Shanghai-based trader.
But with temperatures slowly rising even well before summer, the resulting hot weather could similarly slow construction activity and dampen steel demand, he said.
The most actively traded October rebar on the Shanghai Futures Exchange stood at 3,677 yuan ($577.23) a tonne after a brief loss during early deals on Wednesday. The construction steel product touched 3,715 yuan on Tuesday, a 1-1/2-week high.
The September iron ore contract on the Dalian Commodity Exchange slipped 0.9 percent to 482.5 yuan a tonne, having peaked at 494 yuan in the prior session, a level last seen on March 19.
Stockpiles of rebar at Chinese traders were at 6.39 million tonnes on May 11, down 35 percent from a five-year high in mid-March, data compiled by SteelHome consultancy showed. SH-TOT-RBARINV
Amid firm demand, Chinese mills produced 2.56 million tonnes of crude steel a day on average in April, the most since at least May 2014, based on government data released on Tuesday.
“I don’t think (rising production) is a major risk to prices,” the Shanghai trader said. “The government is still cutting some outdated steel capacity so overall production would not be a major problem.”
Iron ore for delivery to China’s Qingdao port .IO62-CNO=MB dropped 2.4 percent to $67.28 a tonne on Tuesday, according to Metal Bulletin. ($1 = 6.3701 Chinese yuan) (Reporting by Manolo Serapio Jr. Editing by Richard Pullin and Subhranshu Sahu)