Melbourne (Platts)--29Nov2012/439 am EST/939 GMT

Anglo-Australian miner Rio Tinto expects to lower the cost of producing iron ore in the state of Western Australia by more than 30% over the next seven years, allowing it to maintain margins as demand for the steelmaking material starts to slow in China.

Speaking at an investor briefing in Sydney Thursday, the company's head of iron ore, Sam Walsh, said ongoing technical innovations at its mines in the key Pilbara production region of the state and expanded production volumes would help drive down costs.

He said that between January and June, Rio Tinto's average cash cost per metric ton of iron ore produced at its Australian mines was $25.50/mt. With freight and royalties, the miner was delivering ore into China for $47/mt CFR.

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Rio expects this to fall to $35.50/mt CFR China by 2020 through innovations such as the introduction of 150 automated trucks at its mines, employing fewer staff and improving its rail and port infrastructure.

But the major factor will be a production capacity expansion, he said.

"Volume is a significant factor [in costs], and we are the only producer that is significantly expanding our operations," Walsh said.

Rio Tinto said it had added 7 million mt/year to its current nameplate capacity by debottlenecking some of its Pilbara operations. This has lifted capacity to 237 million mt/year, meaning Rio Tinto now expects to expand to 360 million mt/year by mid-2015 rather than to 353 million mt/year as earlier planned.

Walsh said that to date in 2012, Rio Tinto was selling its ore for an average of $2/mt more than the Platts 62% IODEX price.

He attributed this to the miner "matching customers with the right product" and consequently being rewarded for the "value-in-use" aspect of Rio Tinto's product.

"Customers in Japan and Korea see highest value in our Hamersley Iron and Yandi product and buy on long-term contracts. Chinese customers are biased towards Yandi and prefer to buy on quarterly terms," Walsh said.

He added that by 2030, scrap would be more widely used in Chinese steelmaking and that iron ore demand would fall at a greater rate than steel demand.

--Paul Bartholomew, paul_bartholomew@platts.com --Edited by Wendy Wells, wendy_wells@platts.com

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