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UPDATE 1-Iron ore headed for best week ever after China steel rally

* Spot iron ore up 19.5 pct this week, biggest since 2008 launch

* Shanghai rebar retreats after speedy rally, up 60 pct on year

* Goldman Sachs sees iron ore falling to $35 by end-2016 (Adds Goldman outlook and higher trading fees in China, updates futures prices)

MANILA, April 22 (Reuters) - Iron ore is on track to post its biggest weekly gain ever after a rapid rise that lifted it to its strongest since June 2015 as a rally in Chinese steel prices burnished appetite for the raw material.

Shanghai steel futures retreated on Friday after a four-day climb that has pushed their year-to-date gain to 60 percent. Dalian iron ore futures extended their gains by 1.8 percent but came off session highs.

The rally in steel prices has fattened profit margins among Chinese producers, boosting buying interest in spot iron ore cargoes.

Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI jumped 6.8 percent to $68.70 a tonne on Thursday, the highest since Jan. 9, 2015, according to The Steel Index (TSI).

The spot benchmark has gained 19.5 percent so far for the week, its largest such increase since TSI began compiling data in October 2008.

“Steel mills are now also reporting easier access to credit as profitability improves, which may see iron ore demand rise further in the short term,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note.

Tighter supplies following plant shutdowns last year, restocking by consumers and a pick-up in seasonal demand have combined to lift steel prices in China, with Shanghai steel futures up 70 percent from their 2015 trough.

“While China’s steel consumption has shown signs of improvement, we believe the surge in steel and iron ore prices may be overdone on overly bullish sentiment and short-term tightness,” said Dhar.

Goldman Sachs also thinks the rally is unsustainable in the absence of a material increase in Chinese steel consumption that can absorb additional supply from expanding mines in Australia, Brazil and elsewhere.

“We expect the fundamentals of the iron ore market to reassert themselves over the current steel-led rally once port inventories increase and prices converge towards their long-term level of marginal cash cost, falling to $35/tonne by the end of 2016,” Goldman said in a report.

The most-traded October rebar on the Shanghai Futures Exchange closed down 3.3 percent at 2,619 yuan ($403) a tonne. It reached a 19-month top of 2,787 yuan on Thursday.

Rebar surged 6 percent to touch the exchange-set ceiling on Tuesday and Wednesday.

On the Dalian Commodity Exchange, the most-traded iron ore contract closed up 1.8 percent at 473 yuan a tonne after peaking at 493 yuan earlier, its strongest since September 2014. The contract rose by its 6 percent daily limit on Wednesday and Thursday.

Both the Shanghai and Dalian commodity exchanges will raise transaction fees for some contracts including rebar and iron ore, as they try to cool their markets that may be at risk of overheating after this week’s surge. ($1 = 6.4917 Chinese yuan) (Reporting by Manolo Serapio Jr.; Editing by Himani Sarkar)

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