UPDATE 2-Vale expands iron ore client base in China

(Adds details on second-quarter demand, quotes)

By Reese Ewing

SAO PAULO, Feb 20 (Reuters) - Brazilian miner Vale (VALE5.SA) RIO.N, the world's biggest iron ore producer, is expanding its client base among Chinese steel companies, locking in long-term, benchmark supply contracts.

Vale expects to ship a record 30 million tonnes of ore to China in the first quarter of 2009, Jose Carlos Martins, Vale's executive director of ferrous minerals, said on Friday.

China is Brazil's single biggest customer for iron ore and the mining industry is sensitive to any change in demand from the Asian giant, which is still growing economically as other large economies slide towards recession amid the current global crisis.

"We have agreements for an additional 50 million tonnes of ore annually for just new customers in China in long-term contracts," Martins said in a conference call with reporters and analysts.

"We are widening our client base in China," he said, adding that Vale was shipping more ore to China's steel industry than before the crisis. "China is helping cover a lot of weakness in other markets."

"There are around 100 steel mills in China and everyone wants to fix a long-term contract with Vale. So we are developing a completely new customer base on long-term contracts and benchmark prices," he added.

Chief Executive Roger Agnelli said steel mills in Europe, like China, have been burning through their iron ore and steel stocks and could be expected to start buying again in the second quarter.

On Thursday, the company announced fourth-quarter net profit of 10.44 billion reais ($4.44 billion), more than double the 4.41 billion reais it made in the same three-month period of 2007 and the $4.82 billion profit in quarter three.

The eruption of global market turmoil after the collapse of Lehman Brothers last September had caused demand for iron ore to plummet in the last quarter of 2008.

Vale slowed production at some of its mines in Brazil and abroad and in December announced it was cutting 1,300 jobs and put 5,500 on mandatory paid vacation.

SECOND QUARTER

Agnelli said that production by steelmakers in Europe was down around 40 percent in the first quarter and mills there were taking only around 70 percent of their long-term contract ore shipments in order to reduce their inventories.

"Their stocks are running out and they will need ore. They are returning to buy for the second quarter," Agnelli said, adding that it was not a full recovery in demand compared with the pre-crisis levels.

"We did not sell a tonne of ore to Arcelor Mittal, our biggest customer, from October through March, even in long-term contracts, but they are now asking for a reasonable level of ore for April," Agnelli said. (Reporting by Reese Ewing; Editing by Walter Bagley)