UPDATE 1-POSCO to agree to 33 pct iron ore price cut-sources

(Adds details, shares)

SEOUL, May 27 (Reuters) - South Korea's POSCO 005490.KS will follow its Japanese peer Nippon Steel and accept a 33 percent cut in iron ore prices, sources said on Wednesday, a deal that moves the agreement one step closer to being accepted as a global benchmark.

On Tuesday, Rio Tinto RIO.AXRIO.L said it had agreed to cut key iron ore prices to Japanese steelmakers by a third in this year's first contract. [ID:nSP498033]

The long overdue settlement for contracts starting from April was in line with levels rumoured last week but some analysts have speculated the 40-year-old benchmark-setting system may not hold this year, as China has made strong demands for a deeper cut of around 45 percent.

China, which buys more than half of the world’s traded iron ore, wants to see prices return to 2007 levels after six years of rallies have roughly quadrupled iron ore prices.

“The deal between POSCO and Rio Tinto may come as early as today,” one of the sources told Reuters.

“Chinese mills may also have to accept it as a benchmark, because they can’t completely switch to the volatile spot market and need to maintain the benchmark system to a certain degree to secure a long-term and stable supply of iron ore,” the source said.

Some analysts also said China may be forced to accept the deal as it needs to depend heavily on iron ore imports to replace decreasing output from high-cost domestic mines, and the market may tighten later this year when the economy recovers.

“Ensuring security of supply by following the benchmark might now make more sense than risking full exposure to the spot market,” Goldman Sachs JBWere analysts said.

Shares of Asian steelmakers got a boost on Wednesday as the reduction in prices, smaller than the 35-40 percent cut expected by some analysts, eased concerns of another deep steel price cut.

By 0220 GMT, shares of POSCO were up 3.2 percent, outperforming a 1.3 percent rise in the broader market .KS11. Nippon Steel also gained 2.6 percent.

“As POSCO has now announced price cuts and benchmark iron ore prices have finally settled, we do not see significant uncertainties ahead of the company. We expect earnings to sharply recover in the second half on falling raw materials costs and improved output,” Deutsche Bank analysts said on Wednesday. (Reporting by Miyoung Kim; Editing by Jonathan Hopfner and Chris Lewis)