Brazil's Vale may drag out 2009 iron ore price talks

RIO DE JANEIRO/SAO PAULO (Reuters) - No. 1 iron ore producer Vale (VALE5.SA) is in the unusual position of potentially having to scramble to renegotiate term price contracts with steelmakers at a time when it would normally push for new price hikes.

Steel prices have collapsed in recent months along with demand as the global financial crisis strangled growth prospects and developed economies faced what some say could be their first full-year recession since World War II.

With iron ore prices falling, Vale had to shelve plans from just a few months ago to push for an additional 12 percent increase for term prices this year from Asian mills, and it had expected a further increase for 2009.

"It is in Vale's interest to hold out in talks in the hopes that demand returns to something that resembles a normal level," said Rogerio Zarpao, a metals analyst at Unibanco.

In fact, Vale Chief Executive Roger Agnelli said this week the company was delaying its customary, annual sit-downs with larger clients in the steel sector to discuss next year's term prices.

Worldwide steel prices soared nearly 50 percent in the first half of this year on strong demand from China and other developing countries. But, since then, prices have fallen, and some steelmakers have cut production.

Just this week the world's largest steelmaker, ArcelorMittal (ISPA.AS) MTP.PA, deepened production cuts and put growth plans on hold after announcing third-quarter results that missed forecasts.

Agnelli said he hoped that ArcelorMittal, one of his company's largest clients, would honor its long-term ore supply contract with Vale, but he was open to reaching an agreement if it could not.

"However much I want them to honor the contract, we have to realize the following: there is a problem on their side and I want to talk soon with Lakshmi Mittal and see if we can help them," Agnelli said, referring to ArcelorMittal's president.

Traditionally, Vale and the first major steelmaker to reach an agreement on annual ore prices starting April 1 set the benchmark that the rest of the iron ore and steel sector tend to follow.

The major iron ore companies have wrenched massive annual price increases from the steel sector over the past several years due to strong demand from emerging market economies, principally China.

But those days are gone for the time being and analysts forecast iron ore prices to drop by up to 40 percent in 2009.

Last week, Vale (RIO.N) became the first of the three major iron ore producers to announce production cuts, shaving 10 percent from its annual output of 300 million tonnes.

In doing so it also cut purchases from small, third-party pig iron producers, spooking junior miners who use Vale as a gateway to the market.

"I think we can expect others majors to follow Vale's lead," Standard Bank metals analyst Luiz Manreza said, referring to BHP Billiton (BLT.L) and Rio Tinto <RIO.L.

That may end up helping Vale, as less supply enters the market and prices stabilize.

"There is devastation on the marginal iron ore production level. The juniors in Brazil, Canada and elsewhere are disappearing, so supply is being affected as well as demand by this crisis," said Magnus Ericcson, a founder of Raw Metals Group consultants. "I think this will be key if we end up not seeing prices fall too much."

If demand does not return for steel, the sole consumer of iron ore, Vale looks likely to itself renegotiating and slashing term prices in the new year.

(Reporting by Reese Ewing; Editing by Walter Bagley)