* Vale joins Australian miners in offering contract discounts
* Competition among top miners to lure Chinese buyers heats up
* Growing supply may help China gain upper hand in pricing
By Ruby Lian and Fayen Wong
SHANGHAI, June 26 (Reuters) - Brazil's Vale, the world's biggest iron ore miner, is starting to offer discounts on shipments of the steelmaking raw material to top consumer China, joining Australian rivals in cutting prices following a global surge in production.
The move follows deeper price cuts by Rio Tinto and Australia's Fortescue Metals Group for lower-grade iron ore, and indicates China is winning more say over pricing after years of complaining that costs were too high.
Vale is offering some Chinese customers a discount of $2.50 a tonne, including cost and freight, for 62-63 percent grade standard sinter feed Guaiba (SSFG) for third-quarter contracts, three mill sources with direct knowledge of the matter said.
"We've been told by Vale that we would get a price cut of $2.50 a tonne for SSFG for third-quarter contracts. The market is now changing quickly to a buyer's market and competition among miners is intensifying," said an iron ore buying official with a state-owned steel mill.
Benchmark 62-percent grade iron ore .IO62-CNI=SI hit a 21-month low of $89 a tonne on June 16, but has since edged back to $93.70 a tonne.
An official with another large state-owned steel mill, which also sells iron ore to other mills, said the company was still in talks with the Brazilian miner but some of its customers had been offered the same discount.
A Vale spokeswoman in Shanghai declined to comment on contract-related matters.
Iron ore prices have fallen about 30 percent this year amid rising production, leading some steel mills to cut back long-term contracts in favour of cheaper spot cargoes, forcing miners to cut prices to entice buyers.
China buys about two-thirds of global seaborne ore. In the first five months of 2014, its imports rose 19 percent to 382.7 million tonnes. But shipments from Australia jumped 34 percent, while those from Brazil rose only 10 percent.
Vale mainly produces high-grade iron ore with above 60 percent grade, but competes with Australian miners such as BHP Billiton that have lower shipping costs to China.
The company has built a fleet of massive "Valemax" ships, each with a capacity of about 400,000 deadweight tonnes, to cut its shipping costs, but Beijing has so far banned the ships entry to Chinese ports.
Traders said Australian suppliers are also offering more flexibility on pricing to attract Chinese customers.
Vale sees the global seaborne iron ore market growing to 1.81 billion tonnes by 2020 from 1.23 billion tonnes last year.
It is on course to increase annual iron ore output to 450 million tonnes per year by 2018 from 306 million tonnes in 2013, but rivals Rio Tinto, BHP and Fortescue have also increased production.
"The availability of iron ore has risen to a persistently high level not seen in the past 10 years," Standard Chartered analyst Judy Zhu said in a recent note.
Any rebound in demand over the next six months would be matched by increased supply, capping any upside for iron ore prices this year, she added. (Editing by Richard Pullin)