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July 17 (Bloomberg) -- Rio Tinto Group, the world’s second-biggest mining company, sees iron ore prices trading close to current levels, favoring the lowest cost producer as increased output improves profitability.

Prices will remain around $100 a metric ton after declining from “artificially high levels,” Chief Executive Officer Sam Walsh said today in an interview with Bloomberg Television. The steelmaking ingredient has chalked up two straight quarterly losses and closed yesterday at $98 a ton, according to data from The Steel Index Ltd.

Australia, the world’s largest iron ore exporter, last month cut its price estimates for this year and 2015, predicting that surging output will spur the closure of suppliers in China, the biggest buyer. Producers, including Rio and BHP Billiton Ltd., are expanding supply, betting increased volumes from their mines will more than offset declining prices.

“We are the lowest cost producer in the world” and prices around $100 are “truly sustainable going forward,” Walsh said. “We are also bringing on additional capacity which will help continue the improvements in our profitability.”

Rio rose 1.3 percent to A$64.75 in Sydney trading. The shares have dropped 5 percent this year.

China Property

Iron ore prices may fall to $90 a ton in 2015 and $87 a ton in 2016 as credit restraints and uncertainty surrounding China’s property market mean steel mills may be reluctant to carry out large-scale re-stocking, according to Morgan Stanley. Iron ore may slip to $80 a ton over five years, Goldman Sachs Group Inc. said in a July 15 report. Prices hit a record $191.90 a ton on Feb. 16, 2011.

Rio Tinto produces iron ore at a cost of about $44 a ton, compared with $53 for BHP Billiton Ltd., $68 for Vale SA and $77 for Fortescue Metals Group Ltd., according to estimates from UBS AG. London-based Rio’s operations in the Pilbara region of Western Australia will expand production to more than 330 million tons from next year, it said yesterday in a statement. Second-quarter iron-ore production increased 11 percent to 57.5 million tons.

Talks are continuing with Mongolia’s government on the terms of a $4 billion project finance package to fund the underground expansion of the Oyu Tolgoi copper mine, Walsh said.

Mongolia’s Prime Minister Altankhuyag Norov this month urged Rio to accelerate development after it laid off 1,700 workers at the venture in August following a decision to delay expansion.

To contact the reporter on this story: David Stringer in Melbourne at

To contact the editors responsible for this story: Jason Rogers at Keith Gosman

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