Jan 23 - Vale SA, the world's second-largest mining company, is considering setting up an iron ore distribution centre in a southern Chinese port where Baosteel is building a 10 million tonne-per-year steel project, industry sources said on Tuesday.

Baosteel, China's leading steelmaker, and Zhanjiang port signed a memorandum of understanding with Vale in early December during a visit to the mining giant's headquarters in Brazil, said one source with direct knowledge of the matter.

"This is just a very initial idea. The distribution centre, if built, can meet demand from small clients which may not be able to buy a whole cargo of iron ore but can buy a small volume," the source said.

Vale's spokeswoman in China declined to comment. Baosteel and the Zhanjiang government were not immediately available for comment.

Baosteel Group expects to complete construction of the Zhanjiang steel project by 2015.

The distribution centre would improve Vale's access to its top market China, which has not allowed the company's giant iron ore carriers, or Valemaxes, to berth at its ports after one vessel docked at Dalian port in December 2011.

Vale built the Valemaxes to slash shipping costs to China, the world's largest importer of iron ore, and better compete with Australian rivals BHP Billiton and Rio Tinto .

The vessels have, however, faced stiff opposition from influential Chinese ship owners who fear the miner will use the ships to monopolise both the shipping and iron ore markets at China's expense.

Vale has already built a floating iron ore storage vessel at the Philippine-based Ore Fabrica, which serves as a platform to transfer iron ore from Valemaxes to smaller vessels for transport to China and other Asian destinations.