* Spot iron ore set to end August flat, below $60 a tonne
* Hangzhou mills have been ordered to suspend output ahead of G20
By Manolo Serapio Jr
MANILA, Aug 31 (Reuters) - Steel and iron ore futures in China dropped to their weakest levels in almost a month on Wednesday, amid concerns demand in the world's top steel consumer may not keep pace with increased output spurred by a recent rally in prices.
Spot iron ore is set to end August nearly flat, having tracked a pullback in Chinese steel prices after touching a 3-1/2-month high earlier in the month.
"The recent rally in iron ore prices closely mirrored an improvement in Chinese steel prices, which were largely driven by a shuttering of excess capacity in the sector," ANZ analysts said in a note.
"More recently however, the rise in prices has prompted shuttered capacity to reopen and thus a turn lower in steel prices. We expect this dynamic will repeat itself each time prices rise, and as such will keep a lid on iron ore prices below $60."
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI gained 0.3 percent to $59 a tonne on Tuesday, according to The Steel Index. It was up 0.3 percent for the month.
In the futures market, the most-traded January iron ore on the Dalian Commodity Exchange DCIOcv1 was down 1.1 percent at 415.50 yuan a tonne by 0311 GMT on Wednesday. The contract touched a low of 410 yuan, its weakest since Aug. 4.
Amid slow demand for the steelmaking raw material, prices for iron ore stocked at China's ports have eased, traders said.
"Surplus concerns are mounting due to the 13-percent increase in China's iron ore port stockpiles this year," Commonwealth Bank of Australia said in a note.
At 105.2 million tonnes as of Aug. 26, iron ore inventory at China's major ports are near their highest level since December 2014, based on data tracked by industry consultancy SteelHome SH-TOT-IRONINV .
Also curbing demand for iron ore, many small Chinese mills around the eastern city of Hangzhou have been ordered to suspend production to improve air quality ahead of the Sept. 4-5 G20 summit.
The most-active rebar on the Shanghai Futures Exchange SRBcv1 was down 1.2 percent at 2,424 yuan a tonne, after hitting 2,410 yuan earlier, also its lowest since Aug. 4.