* Iron ore restocking appetite wanes ahead of Lunar New Year
* Dalian iron ore drops from three-year high (Updates prices)
By Manolo Serapio Jr
MANILA, Jan 19 (Reuters) - Chinese steel and iron ore futures fell for a second session on Thursday as demand for the commodities turned tepid ahead of the Lunar New Year holiday late next week.
Iron ore dropped from a three-year high reached on Wednesday and traders say that could pull down bids for physical cargoes in the spot market as restocking appetite wanes.
The most-active iron ore on the Dalian Commodity Exchange DCIOcv1 closed down 0.8 percent at 637 yuan ($93) a tonne, after peaking at 666 yuan in the prior session.
Rebar on the Shanghai Futures Exchange SRBcv1 eased 0.9 percent to 3,256 yuan per tonne, slipping further from Monday's one-month peak of 3,418 yuan.
China's renewed campaign to cut excess capacity, targeting producers of substandard steel, has fueled another rally in steel prices this year after sharp gains in 2016. That has pulled iron ore prices higher, even outpacing steel.
"We didn't feel the excitement of the market when it went up sharply this week," said a Shanghai-based iron ore trader, citing few spot deals with most mills having replenished stockpiles ahead of the week-long Spring Festival break that starts on Jan. 27.
Iron ore inventory at China's ports stood at 118.15 million tonnes on Jan. 13, the most since 2004, according to data tracked by SteelHome.
"I think people were a little bit too optimistic about steel demand. From what I heard in the Tangshan steel market, even though they were quoting higher prices, trading activity was not so great and somebody was talking about how difficult it still was to sell steel products," the trader said.
The rapid spike in steel and iron ore futures this week suggested speculative investors took advantage of upbeat sentiment for the sector to raise bets in these commodities as they did last year. China's exchanges later hiked trading fees to tame the wild price swings. ore for delivery to China's Qingdao port .IO62-CNO=MB rose 0.6 percent to $82.05 a tonne on Wednesday, according to Metal Bulletin, but down from Monday's two-year high of $83.65.
($1 = 6.8715 Chinese yuan)