* Vale suspends Sao Luis, Tubarao output on slow demand
* Mine output to increase sinter feed over pellet feed
* Three plants produced 4.93 mln tonnes of pellets in H1
* The plants produced 18 pct of Vale's H1 pellet output
By Jeb Blount
RIO DE JANEIRO, Oct 4 (Reuters) - Brazil's Vale SA said on Thursday that it plans to suspend operations at three Brazilian iron ore pellet plants and increase output of lower-value mine products as world steel demand slows.
The closures remove capacity responsible for nearly a fifth of the company's pellet output in the first six months of the year.
With the pellet plant operation suspended, Vale said in a statement that it will adjust mine output to produce more sinter feed and less pellet feed. Vale's Sao Luis and Tubarao I and Tubarao II pellet plants will go off line starting on Oct. 8.
"The company's decision to shut down some of its pelletizing facilities is a clear indication of the deterioration in the market for high quality iron ore products," said Leonardo Correa, Pedro Grimaldi and Luiz Fornari, Barclay's mining company analysts in a e-mailed report to investors on Thursday.
Vale preferred shares, the company's most-traded class of stock rose 0.95 percent to 35.02 reais in Sao Paulo at Thursday's close.
Pellet feed, like sinter feed, is a form of concentrated iron ore. Pellet feed, though, is filtered to cut water content before being mixed with clay and other materials at a pellet plant. Pellets can be fed directly into a steel blast furnace.
Sinter feed needs additional processing before being used to make steel.
Vale's decision makes economic sense, Correa and his colleagues said because the extra price that pellets earn in the market are close to the $30 a tonne that Vale pays to transform raw pellet-feed iron ore into pellets.
"Sinter feed usually generates higher (profit) margins," the analysts wrote.
Demand for iron ore has fallen in recent months as China's economy cools, U.S. economic growth remains sluggish and European debt problems limit investment. Since May 1, iron ore on the Chinese spot market has fallen 28 percent to 104.20 a tonne, according to Steel Bulletin.
World steelmaking capacity is about a third greater than demand, according to Brazil's state development bank BNDES. Vale, which produces more than a quarter of the world's seaborne, intercontinental iron ore exports, is reviewing its investment plans after a plunge in iron ore prices.
The three Vale pellet plants produced 4.93 million tonnes of pellets in the first half of 2012, Vale said, or about 18 percent of its 26.95 million tonnes of pellet output in the first half.
In the same period Vale produced 150.5 million tonnes of iron ore.
"This is in response to the evolution of the composition of demand for raw materials by the steel industry during the economic cycle which has shown a reduction in demand for pellets," the statement said.