Although China is believed to holding out for at least a 40% cut in benchmark iron ore prices for 2009, it is unlikely to get it, UBS Pactual said in a report released Tuesday.

According to the UBS report, Rio Tinto PLC's (RTP) recent agreement to cut contract prices with steelmakers in Japan and South Korea by 37% will likely galvanize Brazilian mining giant Vale S.A. (VALE) to accept a smaller cut when it settles with its main client China.

"We don't believe China will succeed in getting a better price," the report said.

RTP agreed the 37% cut with Japan's Nippon Steel (5401.TO) and South Korea's Posco (PKX), valid from April 1, in the past week.

Brazil's Vale has made it clear it will settle benchmark contracts only after the two Australian majors, RTP and BHP Billiton Ltd. (BHP), have closed their deals.

Vale managed a lower 2008 term contract price than the Australians and therefore expects to see a smaller reduction in its 2009 contract price.

Vale's higher quality iron ore also commands a premium over its Australian rivals.

The UBS report also said it expected spot markets likely would be the future for iron ore sales.

"Traditional buyers, Japan, South Korea, Taiwan and Europe will likely continue to buy their iron ore on the contract market but we expect that China will evolve into a major spot buyer," the report said.

"Ultimately we see the spot market as a growth market, and thus the revenues for the iron ore producers will increasingly reflect a larger contribution from spot," the bank explained.

UBS also said it didn't expect much improvement in iron ore volume sales in 2010.

"We expect a slow recovery in economic activity over the next year; furthermore we remain concerned that Chinese steel consumption may be front-end-loaded, responding as it has to both fiscal and credit policy. Rio is our preferred pick," the bank said.

-By John Kolodziejski, Dow Jones Newswires; 55-21-2586-6086; John.Kolodziejski@dowjones.com