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* Iron ore price tumbles
* Lowest since late March
* Ominous sign of China's industrial outlook
* A country awash in iron ore
By James Regan and Ruby Lian
SYDNEY/SHANGHAI, July 3 (Reuters) - Iron ore prices dropped to the lowest in more than two months on Friday, sending shivers through the mining industry and heightening worries that Chinese economic activity is slowing just as ore piles up at its ports.
China uses more than a billion tonnes of iron ore a year to make steel - 14 times the consumption of the United States - but Beijing's efforts to shift the economy to consumer-led growth means steel consumption is peaking faster than expected.
"It's clear China can no longer consume all the iron ore that's out there, so something's got to give," said James Wilson, a sector analyst for Morgans Financial in Perth
Shares in Australia's biggest mining houses, including Rio Tinto , BHP Billiton and Fortescue Metals Group led the Australian bourse lower after the price of the raw material fell by 5 percent.
Iron ore delivered to China .IO62-CNI=SI stood at $55.80 a tonne, its weakest since late April, Reuters data showed. The most traded iron ore futures on the Dalian Commodity Exchange followed, slumping to the lowest since April 24 of 402.5 yuan ($64.86) a tonne.
Analysts interpreted the declines as further evidence that China was awash in too much iron ore - with more on its way.
Iron ore stocks at 42 Chinese ports rose 1.7 percent to 81.97 million tonnes by Friday from a week before, data from industry consultancy Umetal showed.
Even as stockpiles grow, fresh cargoes of ore continue to arrive, mostly from Australia and Brazil.
Shipments from Australia's Port Hedland to Chinese ports rose 3 percent to 32.61 million tonnes in June from a month earlier, the latest port data showed.
The June increase at the world's biggest iron ore terminal helped sweep iron ore exports for the fiscal year to June 30 to 21 percent higher to a record 439.6 million tonnes. Of that, 373.24 million tonnes were destined for China, according to the Pilbara Ports Authority.
Steel consumption in China from January to May tumbled an alarming 8 percent from a year before, according Zhao Chaoyue, an analyst with Merchant Futures in Guangzhou.
"China's real steel consumption will fall further over the rest of this year," he said.
Analysts do not expect Australian miners, or the world's top supplier, Vale of Brazil, to slow shipments to China given their low mining and freight costs, pressuring the price and spelling trouble for smaller producers struggling to stay afloat.
China also said on Friday it will allow Valemax 400,000-tonne cargo ships to dock at its ports for the first time since the mega-vessels were commissioned.
Australia's Department of Industry and Science is forecasting more ore and less demand will drive the price of iron ore down to an average $54 a tonne this year and $52 in 2016.
"This is the downside of the $50-$60 range where iron ore belongs in this stage of the cycle," said Morgan's Wilson.
Any benefits to Chinese steel mills of lower iron ore prices have been offset by softer steel demand. Reinforcing bar futures have showed little change since hitting the lowest level on record Thursday.
"The industry's cycles have caught some unprepared and others looking for answers," Rio Tinto Chief Executive Sam Walsh told a London business group this week. (Editing by Ed Davies)