* Spot iron ore up almost 5 pct in August on lean China inventory
* Dalian ore futures add to Friday gains, but Shanghai rebar down (Updates close prices)
By Manolo Serapio Jr
MANILA, Aug 31 (Reuters) - Spot iron ore prices are set to end August higher, supported by lean inventory at Chinese mills and a recovery in futures markets, although expectations of increased supply later in the year may cap upside potential.
Inventory of imported iron ore at major Chinese ports fell to 80.45 million tonnes as of Aug. 28, the lowest since late June, according to data tracked by consultancy SteelHome.
"Lean iron ore inventory at mills and lower port inventory may prevent prices falling to the forecasts of the most bearish among the bears," said Adrian Lunt, assistant vice president for commodities at the Singapore Exchange.
Iron ore for immediate delivery to China's Tianjin port jumped 4.1 percent to a one-week high of $55.50 a tonne on Friday, according to The Steel Index.
The steelmaking commodity has gained nearly 5 percent in August, a bulk of it chalked up in the first week of the month.
Friday's rise followed a 4 percent spike in Chinese iron ore futures and further gains on Monday could push spot prices even higher.
The most-traded January iron ore on the Dalian Commodity Exchange closed 2.9 percent higher at 389 yuan ($60.99) a tonne after jumping to a one-month high of 394 yuan. The contract ended the month by rising 5.5 percent.
But Lunt said with "an anticipated rise in seaborne supply through the second half of 2015, in absence of a strong pick-up in demand, price pressures look set to intensify over the coming weeks" for iron ore.
Buying interest in China, the biggest importer of iron ore, is likely to be tepid this week ahead of public holidays on Thursday and Friday as Beijing mounts a big military parade to mark the 70th anniversary of the end of World War Two.
"We are not ready to buy anything because holidays are ahead. We don't want to sign a contract before the holidays," said a Shanghai-based iron ore trader.
Weaker steel prices in China also pose a risk for iron ore, with some traders unsure whether a seasonal pickup in steel demand in September would be strong enough to revive demand.
Crude steel consumption in China, the world's biggest market for the alloy, shrank 5.2 percent in January-July, according to the China Iron and Steel Association. It declined more than 3 percent last year, the first fall since 1981.
The January rebar contract on the Shanghai Futures Exchange dropped 1.5 percent to 1,952 yuan a tonne by close. It hit an all-time low of 1,917 yuan last week and slumped 6.3 percent in August.
Rebar and iron ore prices at 0754 GMT
Contract
Last
Change Pct Change
SHFE REBAR JAN6
1952
-29.00
-1.46
DALIAN IRON ORE DCE DCIO JAN6
389
+11.00
+2.91
SGX IRON ORE FUTURES SEP
53.9
+0.15
+0.28
THE STEEL INDEX 62 PCT INDEX
55.5
+2.20
+4.13
METAL BULLETIN INDEX
56.04
+2.11
+3.91
Dalian iron ore and Shanghai rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.3781 Chinese yuan renminbi)