UPDATE 2-Rio Tinto sees commodities customers turning cautious

Sun Nov 27, 2011 6:54pm EST

* Still selling all the material it produces

* Customers worried about euro zone, U.S. economies - CEO

* Says aluminium price well below industry's production costs

* Raises Australian iron ore expansion target

* Shares up 2.2 pct, in line with broader market

By Sonali Paul and James Regan

MELBOURNE/SYDNEY, Nov 28 (Reuters) - Global miner Rio Tinto warned on Monday that further cracks may be emerging in global commodities markets as the economies of Europe and the United States waver, with its customers increasingly cautious on the outlook.

Still, the world's second largest miner of iron ore and a large producer of copper, coal, aluminium and other industrial staples, said it was able to sell all the commodities it could produce.

Rio's comments matched rival BHP Billiton , which earlier this month turned slightly more bearish on commodities demand, warning that some buyers were facing tighter access to credit.

Rio Chief Executive Tom Albanese said continuing stresses in the euro zone and a weaker outlook for the U.S. economy were affecting customer sentiment, which had become more negative in recent months.

"For the near term I am concerned about the general softening of prices when we continue to see cost escalation and strong currencies in Australia and Canada," Albanese said in an investor briefing.

"But while there are signs of nervousness, we believe the impact of current economic concerns on our business is manageable, unless financial markets substantially deteriorate," he said.

At the same time, Rio said it had approved $14 billion for projects in 2012 and said that could increase.

It also said it was raising its iron ore expansion target by 20 million tonnes to 353 million tonnes a year by the first half of 2015, from around 240 million tonnes a year currently.

Albanese said prices for copper, coal and other Rio products were "holding up" with the exception of aluminium which is now priced well below the industry's marginal cost of production.

At current prices, the Alcan division's underlying earnings are expected to be around break-even in the second half of 2011, well below the first half.

London Metal Exchange-traded three-month aluminium ended at $1,993 a tonne in the last session, close to its lowest since July last year of $1,982.25.

In response to toughening market conditions in aluminium, Rio is already making plans to permanently close its Lynemouth smelter in the UK.

It has also put its Australian and New Zealand smelters up for sale and placed its Sebree plant in the U.S. under review.

Smelters in France and Norway are also nearing the end of power contracts, which could lead to reviews.

At the company's Kitimat smelter in western Canada, undergoing expansion work to double capacity, costs have ballooned to $3.3 billion under the current estimate from an original price tag of $2.5 billion.

In iron ore, Rio maintained its forecasts that industry supply will need to increase by 100 million tonnes per year for each of the next eight years to meet demand growth and replace higher cost supply sources that may drop out.

"Rio Tinto expects to supply around 25 percent of this industry growth," Albanese said.

The Anglo-Australian company held $18.2 billion in gross debt against $10.3 billion in cash, according to the briefing, indicating it did not face the dire future it did in 2007, when its ill-timed acquisition of Alcan for $38 billion left it deeply indebted and looking for partnerships to help bail it out.

Rio shares were 2.2 percent higher at 2341 GMT, outpacing gains in the broader Australian market

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