* Spot iron ore up 4 pct this week, but still below $40/T
* Firmer Chinese steel prices spur buying interest in ore
By Manolo Serapio Jr
MANILA, Dec 18 (Reuters) - Iron ore is heading for its first weekly increase in five on Friday as Chinese buyers, encouraged by some recovery in steel prices, sought cheap spot cargoes after the market's long-drawn decline.
A meaningful, sustained recovery in the steelmaking commodity, hit hard by a global glut and falling steel demand in top market China, may be difficult to see in the near term, analysts say, with low-cost supply bound to rise further.
Benchmark 62-percent grade iron ore for delivery to China's Tianjin port .IO62-CNI=SI rose 0.8 percent to $38.50 a tonne on Thursday, according to The Steel Index (TSI), marking its third day of gains out of four.
It touched $37 last week, the lowest level recorded by TSI since it began compiling data in 2008.
Miners sold cargoes at slightly higher prices this week from last as Chinese steel prices recovered a bit, said a Shanghai-based iron ore trader.
Most of the cargoes are for delivery to China in January and February, just before the Chinese New Year, suggesting some mills were trying to lock in supply before the week-long holiday.
"But I don't expect big restocking to happen. Most mills are still losing money in the current market," the trader said.
Rebar, a construction steel product, was up 0.6 percent at 1,693 yuan ($261) a tonne on the Shanghai Futures Exchange SRBcv1 . The most-traded contract has rebounded nearly 5 percent from a record low reached on Dec. 1, but still below the November high of 1,811 yuan.
"We believe any rally in the steel price will be short-lived without an improvement in Chinese real-estate and infrastructure demand," ANZ said in a note.
Iron ore futures also stretched recent gains on Friday, with the most-active May contract on the Dalian Commodity Exchange DCIOcv1 gaining 1 percent to 297 yuan a tonne, and prices on the Singapore Exchange 0#SZZF: also firmer.
There may be a meaningful recovery in iron ore prices towards the end of 2016, said Sucden Financial analyst Kash Kamal.
"While we expect some modest pickup from (current) levels the demand outlook in China remains subdued and it's unlikely that steel demand will recover to the levels we saw during the boom years," he said.
Rebar and iron ore prices at 0348 GMT
Contract
Last
Change Pct Change SHFE REBAR MAY6
1693
+10.00
+0.59 DALIAN IRON ORE DCE DCIO MAY6
297
+3.00
+1.02 SGX IRON ORE FUTURES JAN
38.95
+0.48
+1.25 THE STEEL INDEX 62 PCT INDEX
38.5
+0.30
+0.79 METAL BULLETIN INDEX
39.43
+0.25
+0.64
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.4829 Chinese yuan)