Vale says rival poses iron ore index to steel co.s

SAO PAULO, Nov 18 (Reuters) - An executive for Brazil's Vale, a major iron ore producer, said one of the company's rivals has proposed that steelmakers switch to paying for ore based on a fluctuating index rather than the current system of term contracts based on a benchmark price, a local paper reported on Tuesday.

Jose Carlos Martins, executive of the ferrous division of Vale (VALE5.SA)RIO.N, just returned from visiting clients in 20 countries to monitor demand.

Martins said Vale favored the current benchmark system, which bases the price charged for iron ore on the first annual contract settled by Vale and a major steel mill. Negotiations are between a producer and a consumer of ore.

He told the financial daily Valor Economico that the new pricing proposal was put forth by one of Vale's rivals, which include Rio Tinto (RIO.L) and BHP Billiton (BLT.L).

He did not say which rival had propsed the new method of pricing that would replace the benchmark set by Vale with an iron ore index.

Vale, Rio Tinto and BHP account for about 75 percent of global output of iron ore, used solely in steel production.

Martin did not say which index had been proposed to the steel mills. There is more than one and none has been widely accepted.

"As far as we know, this proposal is on the table and was presented to the steelmakers by one of the iron ore producers," Martins said without naming the rival miner. "The position of Vale will be to defend the benchmark system."

He warned that an index price would rise sharply if there were an interruption in supply such as a port problem or a mine strike, while the steel mill with a term price agreement would be protected from that price volatility.

Martins said the debate over the benchmark versus an index system was likely to dominate negotiations over ore prices that are due to begin in the coming weeks. New term prices go into effect on April 1, the start of Japan's business year.

Often negotiations drag on beyond that date and miners apply new prices retroactively.

He said most big steelmakers with long-term contracts to supply steel favor the benchmark system because they feel it limits price volatility.

"I would put in this group most of the Europeans, all of the Japanese and even some of the Chinese. But there still are other players, principally in China, with a short-term vision, more opportunistic, that would fight for the other (index) system," he said.

(Reporting by Reese Ewing; Editing by David Gregorio)