Iron ore hits 5-1/2 year low on slowing China demand

* China eliminated 31.1 mln T of steel capacity last year

* Domestic mines cut ore production due to flood of imports

* 60 mln T of domestic ore capacity to be cut this year

-analyst

(Recasts, adds details, quote, updates prices)

By Ruby Lian and Maytaal Angel

SHANGHAI/LONDON, Jan 27 (Reuters) - Spot iron ore fell to a

fresh 5-1/2 year low on Tuesday, on further evidence Chinese

steel mills are cutting output, curbing demand for the raw

material, and as low-cost producers increased output.

China eliminated 31.1 million tonnes of steel production

capacity last year, higher than expected, a senior official of

the industrial ministry said, as Beijing seeks to ease

overcapacity and improve air quality.

Beijing has also set a target of eliminating 27 million

tonnes of steel output this year.

Benchmark 62 percent grade iron ore for immediate delivery

to China fell 0.8 percent to $62.80 a tonne, its

lowest since May 2009, according to data compiled by the Steel

Index.

Iron ore futures for May delivery on China's Dalian

Commodity Exchange fell 0.2 percent to 470 yuan a

tonne, down a fifth straight day.

"We maintain a longer-term bearish view on iron ore. The

combination of weakness in China's steel industry and ongoing

ramp-ups of low cost supplies is pulling iron ore prices lower,"

said Carsten Menke, Commodities Research Analyst at Julius Baer (Other OTC: JBARF - news) .

Iron ore prices have plunged 50 percent over the past year

as low cost producers like Rio Tinto (Xetra: 855018 - news) , BHP

Billiton and Vale have flooded the

market with new supply just as demand growth in China slows.

Fortescue Metals Group is expected to respond to

the slump in iron ore output by reporting cuts in costs, not

output, in its production update on Thursday.

Li Wenjing, an analyst with Industrial Futures in Shanghai,

said lower iron ore prices and rising imports from Australia and

Brazil could result in shutdowns of about 60 million tonnes of

domestic iron ore capacity this year.

"However, the cut in output will be offset by overseas

expansion," Li said.

Steel demand in the world's biggest producer of the alloy

has slowed as construction activities have been hampered by cold

weather, further dampening prices.

The most-traded May rebar contract on the Shanghai Futures

Exchange fell 0.1 percent to 2,459 yuan ($393) a tonne

by the midday break.

Rebar and iron ore prices at 0330 GMT

Contract Last Change Pct Change

SHFE REBAR MAY5 2459 -3.00 -0.12

DALIAN IRON ORE DCE DCIO MAY5 470 -1.00 -0.21

THE STEEL INDEX 62 PCT INDEX 63.30 -2.60 -3.95

METAL BULLETIN INDEX 63.54 -2.88 -4.34

Dalian iron ore and Shanghai rebar in yuan/tonne

Indexes in dollars/tonne, show close for previous trading day

($1 = 6.2505 Chinese yuan)

(Additional reporting by David Stanway in Beijing,; editing by

Tom Hogue and William Hardy)