A Morgan Stanley report sees World iron ore prices falling at least 35% this year, despite market expectations of a 25% drop, the Estado news agency reported Wednesday.

"If miners want to keep their main client (China) consuming ore they need to accept a fall of at least 35% this year," the bank said.

According to Morgan Stanley, Brazilian mining giant Companhia Vale do Rio Doce (RIO) and Australia's Rio Tinto (RTP) are selling ore at a 20% discount on 2008 contracts. Also, Brazil's Companhia Siderurgica Nacional (SID) and Australia's Fortescue Metals Group Ltd. (FMG.AU) are giving 30% discounts to raise their market share.

The bank also pointed out BHP (BHP) was selling large volumes on the spot market at 42% below contract prices.

Morgan Stanley said China's steel industry fundamentals were still weak, despite a surprising (output) rise in the first quarter of 2009.

The bank said it continued to forecast high steel stocks in China and falling prices for flat steel.

Morgan Stanley also forecasted an 11% rise in Companhia Vale do Rio Doce ADRs on top of current prices in an optimistic view of the market. In a more negative scenario it saw a 4% drop.

"In 2009, a positive scenario (for Vale) would be a 25% fall in iron ore prices with a volume of 260 million tons," said the bank.

However, the bank has forecast Vale output at 243 million tons this year, rising to 273 million in 2010.

Next year, the bank said it expected a 10% cut in ore prices.

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