UPDATE 1-China steel group warns Vale on ore price demand

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By Shao Xiaoyi

BEIJING, Sept 18 (Reuters) - China's steel industry, the world's largest, will inevitably stop using iron ore from Brazilian miner Vale (VALE5.SA) if it insists on a price rise, an executive at the China Iron and Steel Association said on Thursday.

China would encourage domestic iron ore miners to increase production and would decrease overall ore demand at steel mills, including through a reduction in steel product exports, said Luo Bingsheng, the association's vice chairman.

"Vale's price demand was extremely ill-advised as the long-term price for Brazilian iron ore and the spot price for Indian ore have reached the same level," Luo said, adding that domestic iron ore inventories had increased substantially.

Luo said China would not ease controls on steel exports but would be likely to tighten them further, adding that sharp increases in steel product exports in July and August were atypical.

China's steel association has sent a formal letter of complaint to Vale over its demand for higher payments for iron ore.

The moves came after Vale asked its Asian customers to pay about 12 to 13 percent more for iron ore under 2008 term contracts to bring their FOB prices in line with those paid by European steel mills.

Chinese steel mills met at the association's headquarters last week, but failed to hash out a clear strategy for opposing Vale's hike.

But even as they met, Vale seemed to back off its original demand. Chief Executive Roger Agnelli told reporters last week that the price rises it sought were for all for next year, although e-mails received by Chinese steel mills had said higher prices would be effective on Sept. 1.

The attempt to raise prices months after annual prices had already been negotiated was unprecedented and followed a successful effort by Australian miners BHP Billiton (BHP.AX)(BLT.L) and Rio Tinto (RIO.L)(RIO.AX) to get a larger price rise from Asian mills for 2008. (Reporting by Shao Xiaoyi; Writing by Alfred Cang; Editing by Edmund Klamann)