* 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
MELBOURNE/SYDNEY, Nov 28 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.
Prices of iron ore, copper and aluminium -- among Rio's biggest income earners -- have tumbled by more than 20 percent each since August as stockpiles of unused metal swell in warehouses from Rotterdam to New Orleans to Shanghai.
Rio Chief Executive Tom Albanese said ongoing 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 a briefing for investors.
Rio's comments broadly matched rival BHP Billiton , which earlier this month turned more bearish on commodities demand, warning that some buyers were facing tighter access to credit.
Albanese later told reporters Rio was yet to feel the full brunt of the European crisis, though he voiced concern Europe's plight would inevitably touch China, Rio's biggest buyer.
In the latest twist in Europe's long-running debt crisis, Italy's borrowing costs have returned to dangerous levels, with yields now in the territory that forced Greece, Ireland and Portugal to seek international bailouts.
"It's a tough market out there right now," Albanese said, adding that the "jobless recovery" in the United States was also posing a threat to global operations.
Still, the world's second largest miner of iron ore, and a large producer of copper, coal, aluminium and other industrial staples, is selling all the material it can produce, Albanese said.
"I would still be quite confident based on the evidence out there that China was not headed for a hard economic landing, and that's the real key to Rio's performance," said David Lennox, a mining analyst for Sydney-based Fat Prophets.
Analysts expect Rio to make a net profit of around $16 billion this year.
Separately, BHP Chief Executive Marius Kloppers on Monday cautioned steel production growth had stalled in China, where both companies sell the lion's share of their iron ore.
"You're clearly seeing the steel industry running at operating rates that are lower than its historical highs," Kloppers said.
"When we talk to our Chinese customers, there is not a sentiment that the operating rate in the steel industry will improve or change dramatically over the next little while."
Despite mounting concerns among the sector's biggest companies, Albanese said Rio's board had so far approved $14 billion for projects in 2012 -- up from $12 billion in 2011 -- adding that the 2012 figure could yet increase.
Rio raised 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 he believed 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, underlying earnings for its aluminium division Alcan are expected to be around break-even in the second half of 2011, well below the first half, he said.
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.
Rio bought Canada's Alcan four years ago, when the aluminium price was around $2,800 a tonne.
In response to toughening market conditions in aluminium, Rio is already making plans to permanently close its Lynemouth smelter in northeast England.
It has also put its Australian and New Zealand smelters up for sale and placed its Sebree plant in the U.S. under review, though Albanese conceded now might not be the best time to seek buyers.
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 0331 GMT, outpacing gains in the broader Australian market