* Iron ore futures hit over two-week high
* Vale cuts iron ore shipments after port operations halted
* Caution remains as weak demand, oversupply weigh
SHANGHAI, Jan 22 (Reuters) - Chinese iron ore futures rebounded more than 2 percent on Friday after Brazilian miner Vale SA VALE5.SA was ordered to suspend activities at Port of Tubarão over pollution concerns, halting its ability to ship more than a third of its output.
The world's largest iron ore exporter is facing increasing pressure over its environmental record after a dam burst at a mine run by its Samarco joint venture in October, killing at least 17 people. supply disruption at the port has boosted prices of the raw material and investors have raised long positions in iron ore futures, but analysts and traders said a global surplus still weighs on the commodity.
"This will definitely boost prices in the short term. Vale has already cut shipments this month, and the port closure means it will further reduce shipments," said Li Xiaodong, an analyst with Zheshang Futures in Hangzhou.
"However, we'll have to see when Vale will be able to resume operations," Li added.
Open interest on the May iron ore contract DCIOcv1 on the Dalian Commodity Exchange has surged 133,348 lots to 1.56 million lots in morning trade, as investors took long bets, but some expected the gains are vulnerable as oversupply and weak demand keep weighing on the raw material.
"The rally may not be able to sustain for long, as demand is fading before the Chinese New Year," said an iron ore trader in the coastal Chinese city of Rizhao.
The most active Dalian iron ore futures for May delivery surged to a session high of 324 yuan ($49.25) a tonne, highest since Jan. 6. It was up 1.6 percent at 319 yuan by the midday break.
February iron ore futures on the Singapore Exchange SZZFG6 surged 4.3 percent to $40.59 a tonne by 0332 GMT.
The benchmark May contract for rebar futures on the Shanghai Futures Exchange SRBcv1 traded about 1.2 percent higher at 1,834 yuan a tonne by midday.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI dropped 1.5 percent to $40.50 a tonne on Thursday, down for the second straight session, according to The Steel Index.
Rebar and iron ore prices at 0332 GMT
Contract
Last
Change Pct Change
SHFE REBAR MAY6
1834
+21.00
+1.16
DALIAN IRON ORE DCE DCIO MAY6
319
+5.00
+1.59
SGX IRON ORE FUTURES FEB
40.59
+1.69
+4.34
THE STEEL INDEX 62 PCT INDEX
40.5
-0.60
-1.46
METAL BULLETIN INDEX
41.29
-0.32
-0.77
Dalian iron ore and Shanghai rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.5782 Chinese yuan)