* Iron ore futures fall ahead of China holiday
* Iron ore port stocks in China drop from 8-month high (Adds BHP rating cut, updates prices)
By Manolo Serapio Jr
MANILA, Feb 2 (Reuters) - Shanghai steel futures fell to a two-week low on Tuesday, pressured by slow Chinese demand as the sector remained oversupplied.
Losses in steel prices risk eroding gains in spot iron ore which jumped to a one-month high on Monday as some cargoes were snapped ahead of next week's Lunar New Year holiday.
The most-traded May rebar on the Shanghai Futures Exchange SRBcv1 closed down almost 1 percent at 1,815 yuan ($276) a tonne, after falling as low as 1,801 yuan, its weakest since Jan. 18.
Rebar, used in construction, touched a four-month peak of 1,871 yuan on Jan. 27 as mill shutdowns in China, spurred by weak demand, limited supply. But the price has fallen since with underlying demand still soft, traders and analysts say.
ANZ Bank said the "outlook for steel companies remains bleak amid structural oversupply issues."
China, which produces about half the world's steel, is aiming to slash its production capacity by 100-150 million tonnes to fight a glut as domestic steel consumption shrinks. analysts estimate China's surplus capacity at around 300 million tonnes, equivalent to three times the annual output of No. 2 producer Japan.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI climbed 2.4 percent to $42.50 a tonne on Monday, its loftiest since Jan. 4, according to The Steel Index (TSI).
Miners sold several cargoes on the globalORE and COREX trading platforms amid strong bids, TSI said.
Inventory of imported iron ore at China's ports dropped to 94.4 million tonnes last week from an eight-month high of 95.35 million tonnes the week before, based on data tracked by consultancy SteelHome. SH-TOT-IRONINV
Despite subdued prices, major iron ore miners in Australia and Brazil will continue to lift output, although global production will grow at a much slower annual average rate of 0.3 percent during 2016-2020 compared to 4 percent over the past five years, according to BMI Research.
Citing bleak prospects for a price recovery in key mining commodities this year, Standard & Poor's cut BHP Billiton's BHP.AX credit rating and warned it might be lowered further if measures to shore up cash levels were not taken. S&P also said it may cut Rio Tinto's RIO.AX rating.
Australian miners Rio and BHP, along with Brazil's Vale VALE5.SA , account for around two-thirds of global seaborne iron ore.
May iron ore on the Dalian Commodity Exchange DCIOcv1 ended nearly flat at 325.50 yuan a tonne and Singapore futures 0#SZZF: were also little changed.
Rebar and iron ore prices at 0709 GMT
Contract
Last
Change Pct Change SHFE REBAR MAY6
1815
-16.00
-0.87 DALIAN IRON ORE DCE DCIO MAY6
325.5
-0.50
-0.15 SGX IRON ORE FUTURES APR
40.7
+0.21
+0.52 THE STEEL INDEX 62 PCT INDEX
42.5
+1.00
+2.41 METAL BULLETIN INDEX
43.02
+1.30
+3.12
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.5795 Chinese yuan)