* Steel demand set to warm in late March
* China aims to cut about 30 mln T of steel capacity thisyear
* Weaker steel prices weigh down on raw materials
* Iron ore falls more than 3 pct (Updates closing prices, adds iron ore port inventories andcomment)
SHANGHAI, March 5 (Reuters) - Chinese steel prices droppedfor the second straight session to the lowest in a week onMonday as demand remained subdued, dragging down the keysteelmaking raw material iron ore more than 3 percent.
Steel demand has remained weak since the Lunar New Yearholiday in late February and is likely to recover gradually frommid-March. That is limiting gains in steel prices made over thepast few sessions on expectations for more government-mandatedoutput curbs this year.
"The previous gains were mainly driven by the expectationthat output curbs in Tangshan could spread to other northernregions, lifting market sentiment and prices, but demand hasn'trecovered yet, so prices lost support," said Zhao Chaoyue, ananalyst with Merchant Futures in Shenzhen.
"If demand fails to pick up quickly in late March, we mightsee prices entering a downward trend."
The most active rebar on the Shanghai Futures Exchange SRBcv1 fell to a session low of 3,948 yuan ($623.08) a tonne,the lowest since Feb. 26. It was down 1.3 percent at 3,957 yuana tonne by close.
China will cut about 30 million tonnes of steel capacitythis year, the National Development and Reform Commission saidon Monday, putting the country on track to beat its long-termtargets as the government pledged to defend its "blue skies". expected Chinese steel mills to be more experienced inmaximising output by using more scrap and electric arc furnaceswith lower emission.
China aims to expand its economy by around 6.5 percent thisyear, the same goal as in 2017 even though the economy grew 6.9percent last year. This suggests that Beijing is keeping itsfocus on reducing risks to the financial system from a rapidbuild-up in debt. ore on the Dalian Commodity Exchange DCIOcv1 tumbled3.6 percent to end at 520 yuan a tonne.
"Iron ore has the worst fundamental among the whole steelproduction chain due to ample supplies and record high portinventories. So when steel prices go weak, iron ore is hit themost," said a research manager at a trading firm in Hangzhou.
Iron ore inventories at main ports stood at a record high of155.88 million tonnes by Feb. 23, Steelhome data showed. SH-TOT-IRONINV
Coke DCJcv1 slumped 2.5 percent to 2,177 yuan a tonne andcoking coal DJMcv1 declined 0.6 percent to 1,374.50 yuan atonne.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB fell $1.05 to $78.34 a tonne last Friday, according to MetalBulletin. ($1 = 6.3318 Chinese yuan)