Rio Tinto , the world's second-biggest iron ore miner, beat its forecast for iron ore output, reflecting surging demand from Chinese steelmakers and setting the stage for tough contract price talks.

Iron ore output jumped 49 percent in the December quarter, mostly driven by China, leading analysts to suggest that miners such as Rio Tinto, BHP Billiton and Brazil's Vale could achieve big price rises in 2010 after recoiling in 2009.

Rio Tinto aims to boost production a further 6 percent to 230 million tons in 2010 and is strongly considering a leap to 330 million within five years, the company has already said, taking advantage of spot prices that are up about 120 percent since November 2008.

The market consensus is calling for a price increase in excess of 30 percent, commodities analyst Lachlan Shaw, of Commsec Securities, said after Rio's production report on Thursday. Shaw added, however, that new mines opening this year could take some of the steam out of the market.

Fellow Australian miners BHP Billiton and Fortescue Metals are also due to mine millions more tons in 2010.

China's steel industry is the largest consumer of iron ore and refused in 2009 to sign off on 33-44 percent price cuts agreed by other Asian mills, saying it deserved deeper cuts.

Ties with China, Australia's biggest trade partner, have been strained by the Chinese detention of four Rio staff, including Australian citizen Stern Hu, since July over accusations of illegally obtaining commercial secrets.

Australia exported $15 billion worth of iron ore to China in 2008, or 41 percent of China's iron ore imports.

Rio Tinto's iron ore output for all of 2009 exceeded 217 million tons, including full output from mines not wholly owned by Rio, topping its own forecast of 210-215 million.

On an attributable basis Rio's share of production was 172 million tons.

With the spot iron ore price rallying significantly, you can see the strategic sense in ramping up production, said Chris Weston, head of institutional dealing for IG Markets.

Rio shares in London had gained 2.4 percent to 3,625 pence by 1025 GMT, largely in line with a stronger UK mining index <.FTNMX1770>. They gained 175 percent last year, making them the sixth best performer in the FTSE 100 index <.FTSE>.

CAUTIOUS ON OUTLOOK

Rio Tinto said it was witnessing improvements in a range of minerals produced worldwide, but was wary about the future.

We are seeing recovery across most of our key commodities, although we continue to be cautious on the state of the global economy going into 2010, as stimulus packages start to wind down, Rio Chief Executive Tom Albanese said in a statement.

The boost in production marks a turnaround from a year ago, when Rio Tinto was struggling to pay off nearly $40 billion in debt tied to its ill-timed acquisition of Alcan just before the bottom fell out of commodities.

The divestment of $10.3 billion in assets and an on-then-off investment of $19.5 billion by its largest shareholder, China's state-owned Chinalco, was replaced with a rights issue and a merger in iron ore with BHP that is raising the ire of steelmakers from Beijing to Brussels.

The surge in iron ore production masked some weaker numbers for Rio Tinto, especially in aluminum, where output fell three percent in the quarter compared with a year earlier, as it continued to run some smelters below capacity.

The decision to maintain aluminum cutbacks either indicates that costs are higher than we think or that Rio does not believe the current price can be supported by physical fundamentals. The latter is more likely, in our opinion, analyst Paul Galloway at Bernstein Research said.

Aluminum prices have recovered strongly from the depths of the global financial crisis, but inventories are estimated by analysts to be still running at around 44 days of global consumption, against a normal range of six to 20 days.

Aluminum prices have risen more than 50 percent, recovering from sharp declines in early 2009.

Mined copper output surged 36 percent in the quarter and total 2009 production jumped 28 percent from 2008.

It is a big return to business for Rio Tinto in every aspect after the global financial crisis, said James Wilson, a mining analyst with DJ Carmichael & Co.

(Additional reporting by Bruce Hextall and Narayanan Somasundaram in Sydney and Eric Onstad in London; Editing by Clarence Fernandez/Will Waterman)

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