July 23 (Bloomberg) -- BHP Billiton Ltd., the world's biggest mining company, said fourth-quarter iron ore output rose 15 percent to a record, driven by demand from China.

Production rose to 29.7 million metric tons in the three months to June 30, from 25.7 million tons a year earlier, the Melbourne-based company said in a statement. That's up 45 percent from four years ago. Output may rise 23 percent to 137 million tons this year, it said.

Chief Executive Officer Marius Kloppers, 45, is offering $150 billion to buy Rio Tinto Group and plans to spend $85 billion expanding production to feed building booms in emerging economies such as China. Rio booked a 13 percent increase in iron ore production to 41.9 million tons in the June quarter.

``Rio threw down the operational gauntlet and BHP has responded in magnificent fashion,'' said Gavin Wendt, a senior resources analyst at Fat Prophets Funds Management. The report was ``in line with what the market had been expecting,'' he said.

BHP fell as much as 88 cents, or 2.3 percent, to A$38.12 and was at A$38.76 at 1:18 p.m. Sydney time on the exchange. BHP has fallen 3 percent this year, compared with a 21 decline in the benchmark S&P/ASX200 Index.

Commodities are in their seventh year of gains and the so- called ``super-cycle'' may last a further 15 years, according to Merrill Lynch & Co. Iron ore prices have increased fourfold since 2001 and this year BHP and Rio won price gains of as much as 97 percent. BHP also had record quarterly output for alumina, copper and manganese ore.

Cash Flows

``The cash flows coming through will continue to be very large,'' Michael McCormick, who helps manage about $155 million at Leyland Private Asset Management, said before the announcement. BHP's first-half cash flow rose 11 percent to $7.9 billion.

BHP's profit is expected to rise 18 percent to $15.8 billion for the 12 months ended June 30, according to estimates of 13 analysts compiled by Bloomberg. Rio's full-year profit may rise 40 percent to $12.3 billion, according to estimates of 10 analysts.

``We achieved record shipments in iron ore and manganese ore at a time when pricing reached unprecedented levels and demand outlook remains very strong,'' the company said in the statement to the Australian stock exchange. Still, ``supply disruptions and input cost pressures are placing challenges on the industry response to continued strong global demand.''

Coking Coal

Production of coking coal, another ingredient in steelmaking, fell 18 percent as output recovered from flooding at mines in Queensland state in the March quarter. Mines are now operating at 90 percent capacity, BHP said today.

``We had been looking for a strong rebound in coal after the rain,'' Fat Prophets's Wendt said from Sydney. Production increased 33 percent from the March quarter. BHP and partner Mitsubishi Corp. this month bought the New Saraji coal project in Queensland's state for $2.4 billion.

Benchmark contract prices for thermal coal, used by power stations, more than doubled to $125 a metric ton for the year from April 1, and coking coal more than tripled to $300 a ton. Demand for coal soared 33 percent worldwide in the past five years, according to data compiled by BP Plc.

Copper output rose 14 percent in the quarter to 390,700 tons as mine expansions at Escondida and Spence in Chile, and Pinto Valley in the U.S. began contributing production, the company said. The base metals unit, including copper, was BHP's second-biggest contributor to earnings in fiscal 2007.

Output from Escondida, the world's biggest copper mine, may fall as much as 15 percent this fiscal year as it digs lower grades of ore, BHP said. Total copper production from the mine may decline between 10 to 15 percent in the 12 months to June 30, 2009.

Nickel output was down 12 percent to 167,900 tons because of strikes at the Cerro Matoso mine in Colombia, wet weather at the Yabulu refinery in Queensland and scheduled maintenance, it said. The company shut down the Kalgoorlie nickel smelter and refinery on June 12 for four months for a planned rebuild. The earlier- than-planned rebuild will reduce nickel sales by a total of 28,000 metric tons, BHP said in June.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

Last Updated: July 22, 2008 23:36 EDT