"Rio Tinto's position reflects the recent structural shift in the iron ore market away from benchmark pricing," Rio's iron ore chief executive Sam Walsh said in a statement.
"It is in line with our recent comments that benchmark pricing only works if it reflects market fundamentals, otherwise the system would need to change."
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Rio, previously a staunch supporter of the annual pricing system, said it was unable to comment further as negotiations were under way.
Tensions with China
The announcement comes after rival Anglo-Australian miner BHP Billiton last month said it would sell iron ore to most Asian steel mills on a short-term basis, abandoning the annual system which has provoked tensions with China.
The move away from 12-month contracts comes after last year's talks with biggest customer China collapsed when mining companies rejected Chinese demands for steep discounts on the prices already agreed with Japanese and South Korean steel mills.
While the biggest Asian mills favoured the certainty provided by annual prices, smaller operators were frozen out by the mining giants - leading to the potential for bribery exposed in a recent case involving Rio employees.
Four Rio executives received heavy jail terms last month for bribery and industrial espionage surrounding the failed negotiations.
Analysts had expected fellow top producers Rio and Brazil's Vale to follow the BHP move, which had become inevitable after a dramatic rise in spot prices in recent years stoked by insatiable demand from China.
