* Iron ore prices hit a two-week low
* Mills cap output, further denting demand
* Gloomy outlook for the raw material (Updates prices, adds open interest)
SHANGHAI, Oct 27 (Reuters) - Chinese iron ore futures fell further on Friday as the world’s top consumer curbed steel production, denting demand for the raw material and prompting traders to increase bearish bets.
Iron ore on the Dalian Commodity Exchange tumbled 5.6 percent to 428 yuan ($64.33) a tonne by close after earlier hitting 426.5 yuan a tonne, the lowest since Oct. 12. It ended the week 3 percent lower.
“More cities, including Tangshan, have been ordered to deepen production cuts during the winter season. Low-grade iron ore prices have almost touched the bottom, but we don’t see any support for prices in the near term due to falling operational rates at mills,” said Zhao Chaoyue, an analyst with Merchant Futures in Shenzhen.
Investors have increased bearish bets on the raw material. Open interest, or the number of positions held by investors, surged 0.18 million lots to 2.04 million lots by close. One lot contract size equals 100 tonnes.
Iron ore for delivery to China’s Qingdao port .IO62-CNO=MB dropped 1.2 percent to $61.47 a tonne on Thursday, according to Metal Bulletin.
China, also the world’s biggest steel producer, said it had met its target of cutting steel capacity by 50 million tonnes. It has aimed to reduce annual crude steel capacity between 100 million and 150 million tonnes within three to five years.
The environmental crackdown and industrial output curbs are expected to hit not only steel supplies, but also the demand for steel. Steel prices extended losses in the afternoon session.
The most active rebar on the Shanghai Futures Exchange closed down 2.4 percent to 3,577 yuan a tonne. The contract ended the week 1.6 percent lower, its second weekly decline.
Shanghai hot rolled coil futures dropped 3.6 percent to 3,834 yuan a tonne by close. It fell for a second week, down by 3.5 percent, posting the biggest weekly loss in two months. ($1 = 6.6535 Chinese yuan renminbi) (Reporting by Ruby Lian and Josephine Mason; Editing by Sherry Jacob-Phillips and Vyas Mohan)