Vale cuts iron ore supply to a Chinese mill-Merrill

SHANGHAI, Oct 16 (Reuters) - Brazilian miner Vale (VALE5.SA) RIO.N has suspended iron ore supply to at least one of its major Chinese customers, to pressure the steelmaker into accepting a 12 percent price rise in term supplies, a Merrill Lynch report said on Thursday.

Jinan Iron and Steel, China's eight-largest steel mill in terms of 2007 output, confirmed the cut by Vale (VALE5.SA)RIO.N, and expected to be able to operate for 20-30 more days without Vale's ore, Merrill Lynch said in the report, citing statements by company officials during an October visit.

Vale, the world's biggest iron ore miner, has asked its Asian clients to pay about 12 to 13 percent more for iron ore under 2008 term contracts to bring their FOB prices in line with those paid by European steel mills.

Jinan Steel is part of a group of steel mills that pledged earlier this month to limit output by 20 percent to shore up plummetting steel prices. It is in the process of merging with Laiwu Iron and Steel to form Shandong Iron and Steel Group.

Officials at Jinan Steel could not be reached immediately.

Fellow Vale customer Baosteel has diverted some Brazilian ore cargoes as it overhauls a major blast furnace, a shipping source in Tokyo said. At least two of those cargoes were sold at a lower price, he added.

For a FACTBOX on output cuts and maintanence overhauls by Chinese mills, please click on [ID:nSHA291717].

The cuts come as Asian mills gear up for bruising negotiations with international iron ore miners, including Vale, Rio Tinto (RIO.L)(RIO.AX) and BHP Billiton (BLT.L)(BHP.AX) which traditionally begin at a conference later in October.

Mills have already seen margins hit by high costs of iron ore, fuel and coke.

A suspension of shipments by Vale could have helped contribute to a plunge in freight rates to 5-½ year lows. The benchmark Baltic Dry Index .BADI has lost more than four-fifths of its value from its peak of 11,793 points in May, as the deepening financial crisis and slowing demand in China sap confidence.

China's steel industry group has denied market talk that several mills had accepted a demand by Brazilian miner Vale (VALE5.SA) for a mid-year iron ore price hike, calling such a concession "impossible". (Reporting by Alfred Cang and Lucy Hornby; Additional reporting by Risa Maeda in Tokyo; editing by Michael Roddy)