UPDATE 7-Vale gets 65 pct iron ore price increase in Asia

(Adds Vale confirmation, 71 pct Carajas rise, Vale shares)

By Lucy Hornby and Yuko Inoue

BEIJING/TOKYO, Feb 18 (Reuters) - Japanese and South Korean steel mills agreed to a 65 percent jump in iron ore prices from Brazilian miner Vale, the industry's first term deal this year, but Australian miners may hold out for more.

Shares including Japan's Nippon Steel (5401.T) and China's Baosteel (600019.SS) rallied on relief that the increase wasn't greater. The term price of iron ore, the main raw material used to make steel, has risen fivefold since 2001.

Nippon Steel said on Monday it and South Korea's POSCO (005490.KS) had agreed to pay Vale RIO.N $78.90 a tonne for fine ore in the year starting April 1, a rise of 65 percent and the sixth annual increase in a row. JFE Steel, a unit of JFE Holdings Inc (5411.T), Kobe Steel (5406.T), Sumitomo (5405.T) and Nisshin (5407.T) -- all Japanese steelmakers -- also agreed to the increase.

Vale said in a statement that the 65 percent increase was for ore fines from its southern system mines, which ship from the Tubarao port. The southern mines system accounts for about 38 percent of Vale's total iron ore output.

But Vale, which is in talks to buy Swiss rival Xstrata (XTA.L), secured an even bigger price increase for ore from its massive Carajas mine in the Amazon region. Steelmakers agreed to pay a premium for higher-quality ore.

"The Carajas fines are getting a 71 percent price increase," said UBS Pactual analyst Edmo Chagas. "The difference is a premium for quality that has not fully been explained yet."

Carajas alone accounted for 91.7 million tonnes, or roughly 31 percent of the total 295.9 million tonnes of iron ore mined in Brazil by Vale in 2007.

Vale's (VALE5.SA) shares rallied more than 5 percent to 49.02 reais in early trading in Sao Paulo, helping to lift the broader market.

Term ore prices had been widely expected to rise by at least 50 percent after spot prices soared to record highs in 2007 and Chinese demand showed no signs of abating.

"The market was relieved now that one of the negative factors weighing on the stock prices has been played out," said Takashi Aoki, vice president at the equity investment division of Mizuho Asset Management.

Nippon Steel shares rose 3.2 percent while China's Baosteel outperformed the market's advance with a 1.75 percent gain. The Tokyo steel and iron sub-index .ISTEL.T climbed 3.5 percent while the benchmark Nikkei ended flat.

(For a Factbox on iron ore prices see [ID:nSP17821]).

HIGHER PRICES?

BHP Billiton (BHP.AX)(BLT.L) and Rio Tinto (RIO.L)(RIO.AX) would likely hold out for higher prices that would better reflect the lower cost of shipping iron ore from Australia and sizzling spot prices, industry sources and analysts said.