* Singapore iron ore falls nearly 2 pct
* Shanghai rebar comes off five-week peak
* Australia cuts 2016 iron ore price forecast to $40.40 (Adds Australia cutting iron ore forecast, updates prices)
By Manolo Serapio Jr
MANILA, Dec 22 (Reuters) - Iron ore futures in Singapore dropped nearly 2 percent on Tuesday, resuming their decline after recent gains and underlining the market's fragile sentiment as steel prices remained under pressure amid weak Chinese demand.
Shanghai steel futures came off five-week highs.
"Unfortunately for the bulls, the overall supply remains high," commodities broker Marex Spectron wrote in a note to clients. "Demand is weak and may well get even weaker before we see an improvement."
Construction activity in China continues to be weak and will only change if lending conditions improve considerably, it said.
The most-traded January iron ore on the Singapore Exchange SZZFF6 was down 1.9 percent at $39.22 a tonne by 0706 GMT, after hitting $40 on Monday. May iron ore on the Dalian Commodity Exchange DCIOcv1 closed 0.7 percent higher at 308 yuan ($48) a tonne. Both contracts have shed more than 16 percent in the past three months.
Construction-used rebar on the Shanghai Futures Exchange SRBcv1 fell 0.4 percent to 1,731 yuan a tonne after peaking at 1,764 yuan earlier in the session, its loftiest since Nov. 16.
A global glut and shrinking Chinese steel demand have pummeled iron ore prices, with the spot rate down 45 percent this year, outpacing declines in oil LCOc1 and copper CMCU3 .
What will spur a recovery in iron ore would be "junior miners getting out of business", said an iron ore trader in Shanghai.
"A lot of Chinese steel mills will also die out which will reduce overall production," helping tighten the market, the trader added.
Miners need to cut about 250 million tonnes of iron ore capacity, or 18 percent of current supply, over the next three years to balance the market, Goldman Sachs (N:GS) has said. urn:newsml:reuters.com:*:nL3N1461R4
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI gained 0.3 percent to $39.40 a tonne on Monday, according to the Steel Index (TSI).
It marked the fourth straight session of increase for the spot benchmark which tumbled to $37 on Dec. 11, its lowest since at least 2008.
The world's top iron ore supplier, Australia, slashed its price forecast for the commodity by nearly 20 percent to $40.40 a tonne for next year and warned that increased commodities production would only partly offset a collapse in prices. urn:newsml:reuters.com:*:nL3N14B1OL
Rebar and iron ore prices at 0706 GMT
Contract
Last
Change Pct Change SHFE REBAR MAY6
1731
-6.00
-0.35 DALIAN IRON ORE DCE DCIO MAY6
308
+2.00
+0.65 SGX IRON ORE FUTURES JAN
39.22
-0.76
-1.90 THE STEEL INDEX 62 PCT INDEX
39.4
+0.10
+0.25 METAL BULLETIN INDEX
40.46
+0.36
+0.90
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.4787 Chinese yuan)