Vale iron ore move brings index pricing closer

By Nick Trevethan and Humeyra Pamuk - Analysis

SINGAPORE/LONDON (Reuters) - The decades-old system of annual iron ore supply contracts showed fresh cracks last week after its strongest supporter, Brazil's Vale, suddenly demanded Asian steelmakers pay more for already-settled contracts.

But the system, in which big iron ore miners thrash out full-year prices with steelmakers in often bitter and lengthy talks, is likely to persist at least into the next decade until buyers decide that more volatile prices that they can hedge are better than fixed prices subject to the whim of their suppliers.

Last week, industry officials said Vale (VALE5.SA) RIO.N, the world's top iron ore miner, had emailed Chinese customers saying it would extend the 65-71 percent price increase it agreed earlier this year by an additional 20 percentage points from September 1.

On Monday, Japan's Nikkei news agency said Vale had also demanded more money from Japanese steelmakers, an unprecedented revision to annual contracts for the main raw material needed to make steel.

"This is another nail in the coffin for the benchmark as the one big supporter of the system is trying to change terms halfway through the year," a source at a global investment bank said.

In the past, Vale officials have said they were content with the system of annual contracts. A Vale official in Singapore declined top comment on whether that had changed.

Vale's demand could drive frustrated steel makers closer to embracing the ideas pushed by rivals BHP Billiton (BLT.L)(BHP.AX) and Rio Tinto (RIO.L)(RIO.AX), which want to shift to fees adjusted on a more regular basis or based on the spot market.

The three companies together control around three-quarters of the 800 million tonne-per-year world seaborne iron ore market.