Brazilian mining giant Vale (VALE5.SA: Quote)(RIO.N: Quote) will cut its iron ore production capacity by 25 percent this year as it stops producing low-grade ores and shuts down high-cost units, the company's China president, Michael Zhu, told a conference in Beijing on Tuesday.

There will be a 25 percent cut in iron ore production capacity in 2009, Zhu said.

Vale, the world's top producer of iron ore, cut iron ore output by 10 percent, or about 30 million tonnes, late last year. It also idled six pellet plants which accounted for 29.3 percent of its pellet capacity.

Zhu also commented on annual iron ore price talks with China, which has the world's biggest steel sector and is Vale's top customer.

He said Vale strongly supported the existing system of agreeing benchmark prices with Vale and its Australian rivals, BHP Billiton (BHP.AX: Quote) and Rio Tinto (RIO.AX: Quote), since there seemed to be no alternative.

Our question is: what is the Chinese steelmakers' choice? If we don't keep benchmarking, what are the other choices?

He defended the system by saying that since 2003, the average spot market price has been $26 per tonne higher than Vale's benchmark price.

Vale never asked for a higher price (during that time). We always fulfilled our commitment to the contract, he said.

Earlier on Tuesday, Luo Bingsheng, deputy head of the China Iron and Steel Association (CISA), said the miners had agreed to cut iron prices for supplies under the 2009 annual deal, but there was no agreement yet on the size of the cuts.

(Reporting by Beijing newsroom; Editing by Ken Wills)

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