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China steel falls for second day on mounting concerns of supply glut

* Long-buyers sell position over glut concern

* Rebar inventory builds

Restocking demands wane, curbing prices on raw materials

BEIJING, July 21 (Reuters) - China's steel rebar futures fell for a second day on Friday on mounting concern that rising output from mills seeking to cash in on higher prices has glutted the market.

"Investors started to question if the market is turning to oversupply from short supply. The previous optimistic attitude has gone, which also reflects market concern over high margins at mills," wrote analysts at Orient Futures in a note.

Stockpiles of rebar in 35 major cities in China rose 123,600 tonnes to 4 million tonnes by Friday compared with the previous week, according to data on the Mysteel Consultancy website. That's up from 3.9 million tonnes a month ago.

The current margin on rebar was 1,128 yuan ($166.72) a tonne for this week, according to Mysteel. That was steady from last week but up from about 300 yuan a year ago.

The most-active rebar futures contract on the Shanghai Futures Exchange fell as much as 3.2 percent to 3,467 yuan a tonne on Friday. It was at 3,501 yuan, down 2.3 percent, at the mid-day break.

Open interest in the most-active rebar futures contract fell to 3.85 million lots, equivalent to 38.5 million tonnes, on Friday, down from 4.83 million lots the week before.

Spot rebar rose 0.1 percent to 3,945.06 yuan a tonne on Thursday, according to Mysteel data.

"The increasing inventory in steel products along with the heatwave across the country curbing demand for steel products will fuel a bear market for steel and the ferrous metal market," Orient Futures wrote.

The most-traded iron ore contract on the Dalian Commodity Exchange dropped 2.3 percent to 513.5 yuan a tonne on Friday.

Open interest in the September contract has fallen to 1.3 million lots as of Friday, down from 1.8 million lots on Tuesday and the lowest since March 28.

Analysts said mills have been slowing down their restocking process, which put pressure on demands for raw materials.

China's June iron ore output rose to 124.7 million tonnes, its highest level since October 2015, the National Bureau of Statistic reported on Wednesday.

Coking coal futures dropped for a second day on Friday, falling 1.6 percent to 1,232.5 yuan a tonne. The September coke contract slid 1 percent to 1,912 yuan a tonne.

($1 = 6.7659 Chinese yuan renminbi) (Reporting by Muyu Xu and Beijing Newsroom; Editing by Christian Schmollinger)