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Brazilian miner Vale SA (VALE, VALE5.BR) says iron ore market prices will stay stable for the next two to three months, but could then start to rise.

The rainy season which is now beginning in Brazil, the typhoon season in China and lower exports from India should reduce supplies in the medium term, which may start pushing prices up, Vale director Jose Carlos Martins told analysts and investors in London. Prices could also rise if China's central bank loosens its monetary policy, Martins said.

Spot market iron ore prices for delivery into China hovered at around $180 a ton for more than a year, but slumped in early October, and reached a low of $116 a ton in early November, Martins said.

Prices rebounded to $141.50 a ton on Tuesday, and Martins said they are likely to remain in the range of $140 to $150 per ton for the next 60 or 90 days.

More than half of Vale's iron ore contracts now reflect the actual average price for the current quarter, which is about 20% below the price calculated under the previous system, which was based on a "lagged" average quarterly price, Martins said.

Martins said that this explains reports that Taiwanese steelmaker China Steel Corp (CISEY, 2002.TW) has obtained a 20% cut in iron ore prices this quarter, as the Asian firm is moving to the new contract system.

Vale is in negotiations with steelmaker ArcelorMittal (MT, MT.AE)), the world's largest steelmaker and Vale's single biggest customer, over the switching to the new pricing contracts, the executive said.

Around 20% of Vale's sales are still on the old quarterly "lagged" system, including customers in Japan and Korea, Martins said.

According to the director, the new iron ore pricing system, which is closer to spot market pricing, means the market has had to sacrifice the predictability it enjoyed with the previous annual benchmark and quarterly contract systems.

"It's a tough negotiation but we're really flexible," Martins said. However, customers which opt to move to the new pricing system based on current market price averages won't have the option to switch back if market conditions change, he said.

Some analysts have said steelmakers may be tempted by the new system because iron ore prices have been falling, but companies could be in for a shock if ore prices start to rise again.

"It's a one-way ticket--if you go for it you can't come back," he said.

-By Diana Kinch, Dow Jones Newswires; 55-21-2586-6086; diana.kinch@dowjones.com