UPDATE 2-Vale say prepared for new iron ore sales era

(Rewrites, adds comments from CFO at news conference)

By Denise Luna and Reese Ewing

RIO DE JANEIRO May 7 (Reuters) - Brazil's Vale, the world's largest iron ore miner, said on Thursday it is prepared to adopt more flexible pricing methods for selling ore, which could issue in a new era for the company that is known for exclusively selling at annual benchmark prices.

The world's three largest iron ore miners, Vale (VALE5.SA) (VALE.N), BHP Billiton (BLT.L) and Rio Tinto (RIO.L), have met behind closed doors with the biggest steel mills in Asia and Europe for decades to hammer out an agreement on an annual price for ore.

But with the sharp fall in spot market prices for ore in the wake of the international financial crisis, some steel mills and Australian miners are increasingly interested in doing business linked to the spot market.

When asked if the benchmark system may have seen its heyday, Fabio Barbosa, the financial director of Vale, which has been and still is a defender of benchmark prices, said, "It ... will depend on our clients."

Vale executives speaking to reporters made it clear that although the company prefers to do business according to benchmark prices, it would not give up market share to its rivals if clients insisted on more flexible pricing systems.

"The market circumstances are determining that this (benchmark) is not the only system possible and we are prepared for alternatives if our clients should desire," Barbosa told reporters at a conference on Vale's first-quarter results released late Wednesday. "It takes two to dance the tango."

Currently there is no futures market in iron ore as there is for metals such as copper or gold. Benchmark, or term, prices allow miners and steel mills to plan revenue and costs over the year more efficiently, which allows them to plan better for investments in capacity.

The benchmark protects steel mills from prices rising sharply through the year but also locks them into higher costs when the spot ore market falls, as it did in late 2008.

On Wednesday evening, Vale said weak demand hurt first-quarter net profit, which fell a third to $1.36 billion from $2 billion in the first three months of 2008.

MARKET BOTTOM

Vale said it was giving a temporary 20 percent discount to 2008 term prices for about 50 percent of its sale to clients in Asia, in anticipation of the new 2009 benchmark price that has yet to be defined.

Roger Agnelli, the chief executive Vale, said Thursday on an earlier conference call that he thought the first quarter had set the bottom for the overall world metals market, that had softened significantly from the lofty heights of early 2008.

"The first quarter was the bottom in terms of all types of problems we could face right now," said Agnelli. "Overall, the market is not getting worse. It's not recovering yet but it's no longer getting worse." (Writing by Reese Ewing in Sao Paulo; Editing by Christian Wiessner)