* Steel strip, billet down on poor demand
* More steel output cuts to hit iron ore demand
* Iron ore port stocks rise as buying slows (Adds spot price, updates close)
SHANGHAI, July 21 (Reuters) - Shanghai rebar futures dropped on Tuesday as the prospect of further production cuts by mills was more than offset by worries over shrinking demand in China, the world's top producer.
The most traded January rebar contract on the Shanghai Futures Exchange SRBcv1 declined 0.5 percent to 2,081 yuan ($335) a tonne.
The price had gained 3 percent from Friday to Monday as more steel mills are expected to slash production due to widespread losses and tougher environmental measures in the top producing city of Tangshan.
"This rally was led by contracting supplies, but since demand hasn't improved substantially, the strong rebound will not be sustainable," said Xia Junyan, an analyst with Everbright Futures in Shanghai.
Steel strip prices in Tangshan fell 70 yuan on Tuesday to 2,000 yuan a tonne and billet dropped 40 yuan to 1,840 yuan, traders said. The two products are considered barometers for the wider market.
The previous gains in steel had lifted iron ore prices and the most active January contract on the Dalian Commodity Exchange DCIOcv1 rose for the third day, although the upward momentum had stalled by late trade and it closed only 0.4 percent higher at 360 yuan per tonne.
Falling steel production in China is expected to hit appetite for the raw material and increasing supplies of ore from top miners will add to the pressure, pushing prices back into negative territory, traders said.
Iron ore inventories at 42 ports rose 0.3 percent to 80.87 million tonnes from last Friday, according to data from industry consultancy Umetal.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI jumped 3.8 percent to $51.9 a tonne on Monday compared with last Thursday, according to the Steel Index. Asia's spot iron ore benchmark was not assessed on Friday due to a holiday.
Rebar and iron ore prices at 0702 GMT
Contract
Last
Change Pct Change
SHFE REBAR JAN6
2081
-11.00
-0.53
DALIAN IRON ORE DCE DCIO JAN6
360
+1.50
+0.42
SGX IRON ORE FUTURES SEP
48.75
-0.50
-1.02
METAL BULLETIN INDEX
52.39
+1.73
+3.41
Dalian iron ore and Shanghai rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.2086 Chinese yuan)