* Rio rejects benchmark iron ore below current spot price
* BHP says growing spot market breaks down benchmark
* Rio says spot market development depends on China
(Recasts, adds BHP comments)
By Humeyra Pamuk
LONDON, May 8 (Reuters) - A benchmark iron ore price this year below current spot prices is "unacceptable", miner Rio Tinto said on Friday, while rival BHP Billiton saw the traditional benchmark pricing system breaking down.
BHP and Rio's comments came a day after Brazil's Vale, a long-supporter of the benchmark system, said it was prepared to adopt more flexible pricing methods for selling ore.
Steelmakers and top global miners -- Vale, BHP Billiton and Rio Tinto -- are locked in what are often lengthy and bitter annual talks to settle term iron ore prices. The current talks cover the year starting April 1, 2009.
With steel demand slumping, steelmakers are want a price cut of between 40 and 60 percent, but the three miners, controlling two-thirds of the 800 million tonnes of annual seaborne iron ore, are fighting for a much smaller reduction.
"Some customers have suggested a benchmark price for this year below current spot levels which is not acceptable to us," a Rio Tinto spokesman told Reuters in an e-mailed reply to questions. "Particularly against an improving market outlook over the course of the year."
Earlier this week, Shan Shanghua, secretary general of the China Iron and Steel Association (CISA), said the Chinese, led in the negotiations by Baosteel, should be able to get a price below the spot market, which would mean a cut of more than 30 percent.
India's spot iron ore prices remained flat this week, at around $45-$46/tonne FOB, amid low Chinese interest.
OBSOLETE
The annual negotiations continued, but miners, have come to admit that the benchmark pricing system was breaking down with the emergence of iron ore over-the-counter (OTC) swap contracts, a growing spot market and index-based pricing mechanisms. "The industry is now well on the way to moving from a fixed pricing mechanism, represented by the benchmark system, towards a fully developed commodity market," said Ian Ashby, president, Iron Ore at BHP Billiton, said in a closed meeting this week.
As steel and iron ore prices have become tremendously volatile over the past couple of years, market participants have sought alternative pricing mechanisms.
Singapore Stock Exchange launched OTC iron ore swap contracts last month, while UK-based clearing house LCH.Clearnet this week said it will clear OTC iron ore swap contracts from May onwards. Deutsche Bank and Credit Suisse have a paper OTC market in iron ore.
As for the spot iron ore price, both BHP and Rio saw a future in it.
"The spot market is where the buyers and sellers meet to find the true market price for iron ore," BHP Billiton's Ashby said. "From my perspective it should be clear to everyone that the changed market dynamics...makes obsolete a system whereby pricing is locked in for 12 months, based on little or no market transparency."
For Rio, China, the world's top importer of iron ore, will be key for the spot market.
"It...will largely depend on whether the Chinese steel mills wish to adhere to long-term contracts with annual pricing or switch to a system of shorter-term purchases. We can live with either system, or a combination of both."
On Thursday, Vale had signalled it was now open to new pricing mechanisms. "The market circumstances are determining that this (benchmark) is not the only system possible and we are prepared for alternatives if our clients should desire," Fabio Barbosa, the financial director of Vale, told reporters.
(Reporting by Humeyra Pamuk, Editing by Keiron Henderson)