* Posco wants return to yearly iron ore pricing system
* Korean steelmaker considers buying into Brazil plant
* CEO says not in talks with Vale about participation
* Posco also eyeing stake in Thyssen's Alabama mill
By Gustavo Bonato and Leila Coimbra
SAO PAULO/RIO DE JANEIRO, June 21 (Reuters) - South Korea's Posco and other steelmakers want to return to annual contracts with iron ore miners, Posco's chief executive said, suggesting volatile prices and a gloomy global economy are nudging steel producers back to the age-old system.
Chung Joon-yang's comments on Thursday exposed the sector's fragility amid weak demand, and is the strongest sign yet of discontent over the current spot-based pricing system, which has deeply hurt margins of steel mills given wild price swings.
Vale chief executive Murilo Ferreira said the world's largest iron ore miner was prepared to negotiate with customers over their preferred price-setting system but would not allow switching back and forth at will.
"Whatever customers consider most appropriate, we will do it. What we can't have is opting for one price mechanism and changing again two months later. Not this," Ferreira said during an event at the Rio+20 conference on sustainable development.
The 2008-09 financial crisis caused the global steel sector, led by Chinese mills, to jump ship on the annual contract system to take advantage of falling spot market prices for iron ore.
Brazil's Vale followed its Australian rivals Rio Tinto and BHP Billiton to price iron ore on a quarterly and eventually monthly or spot market system.
But Chung, head of one of the world's leading steelmakers, said producers needed the stability that the former system provided, enabling companies to predict costs more accurately.
"We hope Vale and others will go back to the old system (of annual pricing)," Chung said at a separate event in Sao Paulo on Thursday.
"That way (steel) companies are more stable. Other steel companies want to go back to the old system," he said, without specifying which ones.
A spokesman for Nippon Steel, the world's No.4 steelmaker, declined when asked for a response to Ferreira's comments.
Shinya Yamada, an analyst at Credit Suisse in Tokyo, said: "Steelmakers are struggling from weak demand and declining margins and are looking for stability as that would make it easier for them to negotiate prices and recover costs in talks with their long-term users."
At $137.40 a tonne, the price of iron ore is still more than double its low in 2009 during the last global financial crisis - about a year before the four-decade old annual pricing system gave way to a more flexible quarterly scheme.
Prices neared $200 a tonne in February 2011 for the steelmaking raw material, the biggest revenue earner for Vale, BHP Billiton and Rio Tinto. Prices have stayed above $100 since late 2009, more than double the production cost of big producers.
A move back to the annual benchmark could hurt Vale if it locked in prices with mills now, only for them to start climbing subsequently if a pick-up in the economy of key customers like China pushes up demand for the steel ingredient.
China, which buys around 60 percent of the world's seaborne iron ore and had resisted the move away from the annual pricing system, would be the big winner. However, Chinese buyers have also been known to renege quickly on contracts if prices don't suit them, as happened during the 2008-09 global crisis.
Just last month, some Chinese steel mills postponed delivery of iron ore from miners, seeking to tweak contract prices after spot rates fell to their lowest for the year and as they dealt with sluggish steel demand at home. Chinese buyers employed the same strategy in October 2011.
U.S. steelmaker RG Steel LLC filed for Chapter 11 bankruptcy protection on May 31, however, citing deteriorating market conditions, underscoring the vulnerable state of the industry.
THYSSENKRUPP CSA STAKE?
Separately, Chung said Posco was studying the possibility of buying a stake in ThyssenKrupp AG's CSA steel slab mill in Rio de Janeiro.
"We just received information on CSA, operated by Thyssen in Brazil, and we are reviewing it internally," Chung said in Sao Paulo. "I'm not in a position to say yes or no (about a stake acquisition) but we are definitely analysing it at the moment."
News reports surfaced over recent weeks that Posco and Vale , which holds 27 percent of CSA, were considering buying out Thyssen's stake in the mill.
Vale has said it is not interested in taking a controlling stake in steel mills but did not rule out potentially increasing its holding in CSA. Vale says it is cautious about raising its profile in steelmaking as it does not want to turn into a competitor with its own customers for iron ore supplies.
Chung said Posco has not been in talks with Vale over possible participation in CSA. He also said Posco was studying a possible stake in Thyssen's Alabama steel plant.
Shares in Vale traded on Sao Paulo's BM&F stock exchange fell 2.8 percent on Thursday to 38.85 reals ($19.08).