ANALYSIS-Anglo to be hit more by iron ore deals than Rio, BHP

* Benchmark slumps for top-quality iron ore prices

* Anglo more exposed to quality segment, EPS downgrades

* Some analysts upgrade Vale, Rio, BHP earnings forecasts

By Eric Onstad

LONDON, June 1 (Reuters) - A sharp fall in prices of high grade inputs for steelmaking is set to deepen the underperformance of Anglo American (AAL.L) relative to a red-hot mining sector and notably archrival Rio Tinto (RIO.L) this year.

Under initial benchmark prices agreed last week, top quality iron ores slumped more than the most widely used grade, prompting some analysts to pencil in earnings cuts for Anglo American and upgrades for Rio Tinto and Brazil's Vale (VALE5.SA).

Rio (RIO.AX), the world's No. 2 iron ore producer, agreed with Japanese and Korean steelmakers to cut the annual price of standard "fines" ore by 33 percent, but top quality lump iron ore by 44.5 percent. [nSP498033] [nSEO273690]

Anglo and rivals have yet to finalise their own settlements, but the first iron ore benchmark agreement sets the tone for price deals throughout the industry.

"Although AAL has lower iron ore exposure than RIO, it has greater exposure to lump... resulting in the potential for slightly larger earnings downgrades," Citigroup said in a research note.

Lump iron ore accounts for more than two-thirds of production at Anglo, the world's fourth biggest iron ore producer and majority owner of South Africa's Kumba Iron Ore (KIOJ.J), it added. Anglo (AGLJ.J), which produces most of its iron ore in South Africa but is developing mines in Brazil, declined to comment.

SOUTH AFRICAN EXPOSURE

Rio shares have doubled this year, leading a surge in mining stocks. Anglo, by contrast, has risen just 21 percent, underperforming a 54 percent rise in the DJ STOXX European Basic Resources index .SXPP.

Anglo is also due to be worst hit of the major miners by stronger currencies in metals-producing nations. South Africa accounted for 55 percent of Anglo's 2008 operating profit. [nLL558748]

Bank of America Merrill Lynch said last week it made "significant" cuts in earnings per share estimates for Kumba due to the Rio settlement and the stronger South African currency.

Quality iron ore products make up a smaller portion of total output at No. 1 producer Vale (VALE.N), Rio and No. 3 BHP (BHP.AX) (BLT.L), accounting for 12 percent, 29 percent and 31 percent respectively, according to Citigroup. [nL1225111]. Prices for high quality lump and pellet iron ore are volatile. They are more in demand when steel prices are high since they need no initial processing as opposed to fines, but they are shunned when prices are weak and mills are seeking to contain costs.