By James Regan
SYDNEY (Reuters) - Rio Tinto reported on Wednesday a sharp rise in iron ore output in Australia, as the global miner aggressively expanded shipments to China, banking on its low costs to displace local Chinese producers.
Mega miners such as Rio, Brazil's Vale and BHP Billiton have been ramping up output, reducing their costs even further despite concerns of an oversupply as China's steel output growth moderates.
China's domestic industry is fragmented, with miners in coastal areas suffering under some of the highest production costs in the country - well above the price of imported ore from Australia and Brazil.
Ore from China's estimated 6,000 mines on average contains less than 30 percent iron, compared with Australian and Brazilian ores that typically have close to double that amount.
Rio Tinto, which competes with Vale, BHP and Fortescue Metals Group in the seaborne iron ore market, said it was on track to produce 295 million tonnes of the steel-making material in 2014, up from 266 million last year.
"Our iron ore expansion continues to deliver high-margin growth reinforcing our position as a low-cost producer," Rio Tinto said in its second-quarter production report on Wednesday.
Second-quarter iron ore shipments climbed 23 percent on the same period a year ago to 75.7 million tonnes, while production of the steel-making ingredient rose 11 percent to 73.1 million, the company said.
China has the world's biggest steel industry, requiring about 1 billion tonnes of iron ore annually.
Analysts have questioned the expansion plans of big iron ore miners in the absence of hard evidence Chinese mines were closing and volatility in iron ore spot pricing markets.
Iron ore for immediate delivery to China stood at $98 a tonne on Wednesday, but fell as low as $89 in mid-June, it weakest price in 21 months.
However, consultancy Wood Mackenzie forecasts that China will this year close up to 80 million tonnes of domestic mine production - more than a quarter of its total annual output.
"All our customers are interested in is how much it will cost to make a tonne of steel and how much they are paying for iron molecules in the ore," said Nev Power, chief executive of Fortescue metals Group Ltd, which has spent more than $10 billion (6 billion pounds) establishing a 155-tonnes-per-year mining business in Australia.
Fortescue delivers its ore for around $52 a tonne.
Rio Tinto breaks even when iron ore sells for around $43 a tonne, while BHP needs $45 a tonne to stay in the black.
BHP is lifting output to between 260 million and 270 million tonnes from a 217 million tonne target in 2014 and is likely to show a sharp rise in June quarter output when it releases production data on July 23.
(Editing by Richard Pullin)