UPDATE 4-Vale cuts Japan, Korea iron price, China talks loom

* Vale slashes ore prices to Japan and Korea

* Strengthens company positions in talks with China

* Follows similar cut by Australian rival Rio Tinto (Recasts, Baosteel price hike, Vale supply deal report, analyst comment)

By Brian Ellsworth and Denise Luna

RIO DE JANEIRO, June 10 (Reuters) - Brazilian miner Vale said Wednesday it cut iron ore prices to Japan and Korean, dealing a blow to revenues but still bolstering its position in talks with Chinese steelmakers seeking even bigger cuts.

The tough stance of China, the world's largest steel producer and iron importer, has put increasing strain on a 40-year-old benchmarking system for ore prices that is already facing heavy criticisms that is obsolete.

The deal came as China's largest steel producer hiked its prices prepare for unexpectedly high iron costs and a newspaper reported Vale (VALE5.SA)(VALE.N) struck a supply accord with small mills, undercutting China's main steel association.

"This is bearish for China's steel industry because these are not the cuts that China is trying to get," said Michelle Applebaum, an independent equities analyst and steel expert.

"(China's) steel production is near an all time record, their demand for ore is going to be very strong this year. So where's the negotiating leverage?"

Vale said in a securities filing it cut fine ore prices by 28.2 percent from 2008 levels, less than the 33.5 percent cut offered by Australian rival Rio Tinto (RIO.L)(RIO.AX) and far below the 40 to 50 percent reduction China is seeking.

The company cut the higher-quality lumps prices by 45 percent to steelmakers that include Japan's Nippon Steel Corp. (5401.T), and South Korea's POSCO (005490.KS) -- almost identical to Rio's price cut for those countries' buyers.

Analysts noted the 48.3 percent cut in pellets, a manufactured product with more specific industrial uses than other types of ore, may help activate stalled sales.

Industry sources told Reuters China's top steelmaker, Baosteel (600019.SS), raised July prices for major steel product prices by more than 10 percent on the possibility of higher-than-expected iron ore costs. [nSHA202439]

Vale reached supply contracts with 38 small Chinese steel mills for a combined volume of more than 50 million tonnes for this year, giving it an advantage in securing supply volume in China, Beijing News reported on Wednesday. [nSHA257120]

A company spokesperson said there would be no further comments from the company about the price cut.

CLOSE TO EXPECTATIONS

"This is not far from what we expected, the market was talking about something between 25 and 27 percent for fines, which is the principal product for Vale," said Pedro Galdi, an analyst with the brokerage SLW in Sao Paulo.

"But the important thing now is China -- there is a lot of pressure to close that deal before the end of the month."

Chinese spot market steel prices risen since April as traders bet on prices will go up even more, but the outlook for China's steel sector remains murky as export demand has collapsed and its domestic market remains uncertain.

Rio, the world's second-largest iron producer, in May agreed to reduce fine ore prices by 33 percent from 2008 prices to Japanese buyers and cut higher quality lump ore prices by 45 percent.

Last week it announced a proposed tie-up of iron operations with Australian Rival BHP Billiton (BHP.AX)(BLT.L) that would have to be approved by anti-trust regulators.

Rio, BHP and Vale set iron ore prices each year in talks with steelmakers, a benchmarking system that has characterized iron markets for decades.

Experts say the growth of spot market sales and possibility for widespread use of futures contracts threatens to render the system obsolete, though analysts say it provide protection from growing volatility of commodities prices.

Miners until last year had the upper hand in price negotiations as strong demand let them command hefty increases, the financial crisis turned the tables, giving Asian steelmakers a stronger position to demand steep cuts.

Vale this year waited for other producers to announce the new prices they had negotiated before committing to a rate after Australian miners clinched better deals in 2008 based on lower shipping costs.

For a graphic of global iron ore prices, please click on: here (Editing by John Picinich)