* Big iron ore miners pushing supply side to weed out rivals
* Mining record tonnages despite signs of glut
* BHP, Rio, Vale, Fortescue expansion to continue as long as margins hold up
* BHP ahead of plans for iron ore expansion
* Underscores faith in Chinese iron ore demand
By James Regan
SYDNEY, July 17 Record iron ore output from BHP Billiton and other mining giants appears to defy logic, with demand for the steel-making raw material cooling in top customer China and a price-eroding supply glut looming.
But the sector's heavy guns are digging more for less to tighten their stranglehold on the world's second-biggest commodity market, as competitors struggle.
In mining parlance, this is known as a "rebalancing" strategy, designed to improve the operating margins of the majors to such an extent that smaller competitors or new projects may be all but squeezed out.
"The majors want to maximise those economies of scale," said MineLife sector analyst Gavin Wendt. "As long as they keep margins well ahead of a declining iron ore price, they are winning."
BHP Billiton, Rio Tinto and Fortescue Metals Group, with their iron ore operations in Australia, and Brazil's Vale are leading the charge.
Seaborne-traded iron ore prices, which have lost 10 percent so far this year, are forecast to hit their lowest in four years by the end of 2013 as these big miners dig deeper and faster.
At the same time, forecasters are warning slowing industrial activity in China will result in weaker overall demand for ore.
But Rio Tinto and BHP are among the most efficient iron ore producers in the world. At current prices of around $130 a tonne, each enjoys a margin of around $80 per tonne.
AHEAD OF SCHEDULE
BHP on Wednesday said expansion of its iron ore division was running ahead of schedule after posting a robust 9 percent rise in ore output to a record 187 million tonnes in the 12 months to June 30. By December it aims to be operating at a 220-million-tonnes-a-year rate.
BHP under the former chief executive, Marius Kloppers, stuck to a policy of mining at maximum rates as long as profits held up.
New BHP Chief Executive Andrew Mackenzie is showing no signs of changing tack.
It was Kloppers who in 2010 almost single-handedly broke the half-century old annual iron ore price-fixing mechanism and replaced it with spot indexing in order to weed out weaker producers.
Steel mills across Asia and Europe initially resisted the switch but were eventually forced to accept the new terms.
Rio Tinto on Tuesday pointed to moves to lift its iron ore production capability by 35 percent to 360 million tonnes in 2015, estimated by analysts to carry a $5 billion price tag.
The firm has already started port and railway work and is debating whether to dig new mines altogether or simply expand its existing ones.
Vale, the world's biggest iron ore miner, this month was cleared by Brazil's Environmental Protection Agency to undertake a $19.5 billion expansion of its Carajas iron ore mine, one of the world's richest and most productive.
Fortescue has awarded contractor Leighton Holdings A$2.8 billion in work to expand its mines in Australia by a further 60 million tonnes per year.
Such commitment to rapid expansion shows global miners see the risks to rebalancing as manageable.
Spot iron ore prices this week edged up to two-month highs, backed by Chinese steel mills replenishing inventories, although the pace of restocking may have slowed, suggesting a two-week rally may soon end.
Indicating how shipments are holding up, iron ore exports to China from Australia's Port Hedland alone, which handles about a fifth of the global trade, were up 43 percent in June from a year ago.
Other major export terminals, from Australia to South America, are recording record tonnages.
The Australians count almost solely on China for revenue from iron ore. Vale's ore feeds steel mills in China and also Europe.
BLEAK FUTURE FOR SOME
The strategy of all-out expansion portends a bleak future for projects in early stages of development.
These include the $10 billion South Korean steel group Posco -backed Roy Hill mine in Australia and Sundance Resources Ltd's $4 billion Mbalam project in Cameroon and Republic of Congo.
A small army of smaller projects peppering Australia's iron ore rich Pilbara and mid western iron belts and the Brazilian interior are also at risk.
Some big miners are also rethinking their strategy. Glencore Xstrata Plc is halting production of iron ore in Australia next month, citing deteriorating market conditions and ending a two-year experiment to gain a toehold in the sector.