* Down 8 pct for July despite 7.7 pct gain this week
* Iron ore hit 4-week high above $55/T on Wednesday (Updates futures)
By Manolo Serapio Jr
MANILA, July 31 (Reuters) - Iron ore is set to show a loss in July, the second negative month in a row after worries over plentiful supply cut short this week's rally, with Chinese steel demand unlikely to perk up.
Iron ore spiked above $55 a tonne on Wednesday to push its weekly gain to nearly 8 percent, but the increase was not enough to wipe out losses earlier in the month.
Steel production may be restricted in areas surrounding Beijing to curb pollution ahead of a major parade celebrating the 70th anniversary of China's victory in World War II in September, trading sources say.
That spurred market expectations that Chinese mills may produce more steel before being shut and therefore boost short-term demand for iron ore.
"This week's price increase was mostly sentiment-driven," said a Shanghai-based trader. "We're still expecting a lot of supply to come through and the price should only be around $50 for the rest of the year."
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI dropped 1.3 percent to $54.60 a tonne on Thursday, according to The Steel Index.
The steelmaking commodity climbed to $55.30 on Wednesday, its highest since July 2. It has gained 7.7 percent so far this week, its best performance since April, but is still 8 percent down on the month.
"I don't think there is a big intention for mills to restock heavily. Iron ore stocks are still relatively high," said Helen Lau, an analyst at Argonaut Securities in Hong Kong.
China's apparent steel consumption dropped nearly 5 percent in January-June, according to the China Iron and Steel Association, and traders said the usual construction lull during the summer months would keep steel prices low.
On Friday, the most traded rebar for January delivery on the Shanghai Futures Exchange SRBcv1 closed 0.1 percent lower at 2,095 yuan ($340) a tonne, pulling back from this week's peak of 2,118 yuan.
The January iron ore contract on the Dalian Commodity Exchange DCIOcv1 slipped 0.7 percent to 367 yuan a tonne, off Thursday's three-week high of 374.50 yuan.
Rebar and iron ore prices at 0702 GMT
Contract
Last
Change Pct Change SHFE REBAR JAN6
2095
-2.00
-0.10 DALIAN IRON ORE DCE DCIO JAN6
367
-2.50
-0.68 SGX IRON ORE FUTURES SEP
50.45
+0.41
+0.82 THE STEEL INDEX 62 PCT INDEX
54.6
-0.70
-1.27 METAL BULLETIN INDEX
55.64
-0.25
-0.45
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.2096 Chinese yuan)