2nd UPDATE: China Steel: Vale Agreed To Cut 4Q Iron-Ore Shipment Price By 20%-25%

China Steel Corp. (2002.TW) said Tuesday that Brazil's Vale SA (VALE) agreed to slash its price of iron-ore shipments for delivery in the fourth quarter by 20%-25%, as the biggest steelmaker in Taiwan reduces capacity utilization amid sputtering demand.

Iron ore prices have fallen sharply in the second half on the back of faltering demand due to Beijing's tightening measures, worries over the euro-zone debt crisis and a slow recovery of the U.S. economy. The decline of iron-ore spot prices has prompted steelmakers around the world to negotiate with suppliers for lower prices, in a bid to push down costs.

The deal with Vale will be the first of a series of steps China Steel plans to take amid a tough time for the global steel sector. The company is also in talks with BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU) on price cuts and hopes to defer or suspend some shipments of iron ore and coking coal as well, a China Steel official involved in the price-cut talks who didn't wish to be named said.

The official told Dow Jones Newswires that the Brazilian miner agreed to price fourth-quarter shipments based on the Platts iron ore index in the October-December period, instead of using an average of the June-August period as previously agreed, which was higher.

Vale supplies around 30% of China Steel's ore needs. A spokeswoman for Vale at the company's headquarters in Rio de Janeiro declined comment for this article.

"We are still discussing with BHP and Rio Tinto. It is more difficult for us to reach an agreement with them any time soon," the China Steel official said, adding that the two Australian miners supply a combined 70% of China Steel's needs.

Capital Securities analyst Michael Chung said China Steel "is moving in the right direction...deferring or cutting shipments from suppliers is not enough, cutting prices to lower costs is important as well."

Another analyst from a local brokerage said the spot iron ore price now is US$130-US$140 a metric ton, compared with US$160-US$170 in the June-August period.

The analyst expects China Steel's overall iron-ore cost will fall 7%-8% in the fourth quarter following the deal with Vale.

China Steel said in November that it was actively seeking to defer or cut upcoming shipments of iron ore and coking coal from major suppliers, after cutting its local selling prices by an average 7.08%, the steepest cut since the third quarter of 2009.

-By Fanny Liu and Aries Poon, Dow Jones Newswires; 886-2-25022557; [e-mail]

(Matthew Cowley in Sao Paulo contributed to this article)