Iron ore at two-year low as China traders desert market

* Mills destocking in absence of positive economic news

* Iron ore prices could see further falls - trader

* NDRC calls for more transparent pricing mechanisms

By David Stanway

BEIJING, Sept 3 (Reuters) - Iron ore prices have fallen to

their lowest point in two years as cash-strapped Chinese traders

desert the market amid flagging property sales and a growing

supply glut.

Traders continue to await fresh measures from the central

government either to stimulate the economy or close down poorly

performing steel mills.

"My personal point of view is that the market is still in a

destocking phase and prices still have room to fall further,"

said a steel and iron ore trader based in the eastern Chinese

province of Zhejiang.

"Overcapacity is still the major problem and it can only be

tackled by reducing supply or raising demand," he said.

Benchmark 62 percent iron ore for immediate delivery into

China fell another 0.5 percent to $86.70 per

tonne on Tuesday, matching the lowest point of a price fall in

September 2012. Iron ore has fallen nearly 36 percent since the

turn of the year.

The most traded rebar contract on the Shanghai Futures

Exchange also continued its long plunge on Wednesday

morning, hitting a new low of 2,876 yuan per tonne, down 1.2

percent. The most active iron ore contract on the Dalian

Commodity Exchange finished at 616 yuan per tonne,

down 1.6 percent.

Big supply increases from Australia have raised the

country's share of China's total iron ore imports to 57 percent

in the first seven months of 2014, up from 51 percent last year,

the main reason why prices have fallen so rapidly.

"Structurally, prices have adjusted lower because we have

this big surge of new supply coming in that has displaced some

of the other tonnage - this has reset the average price level

for iron ore," said Graeme Train, analyst with Macquarie in

Shanghai.

"We saw a build-up in inventory throughout the supply chain

earlier this year, but now the macro data has peaked, mills and

traders are letting their inventory go. These up and down

movements are occurring around an average that is much lower

than before."

The National Development and Reform Commission (NDRC),

China's state planning agency, urged miner BHP Billiton (NYSE: BBL - news)

in a meeting this week to improve the transparency of its

pricing system and cooperate more with Chinese enterprises when

it came to setting prices.

"Amid changes in the relationship between iron ore supply

and demand and as prices enter into a declining phase, (we)

should proactively seek new pricing methods," the NDRC quoted an

official as saying at the meeting.

Rebar and iron ore prices at 0345 GMT

Contract Last Change Pct Change

SHFE REBAR JAN5 2876 -35.00 -1.20

DALIAN IRON ORE DCE DCIO JAN5 616 -10.00 -1.60

THE STEEL INDEX 62 PCT INDEX 86.7 -0.40 -0.46

METAL BULLETIN INDEX 87.4 -0.22 -0.25

Dalian iron ore and Shanghai rebar in yuan/tonne

Index in dollars/tonne, show close for the previous trading day

(Editing by Richard Pullin)