It's the destination that counts for this iron ore

In the past few months, the announcements have been coming thick and fast as Albanese pulls out all the stops to ramp up production.

Obviously with prices at a record, Rio is attempting to maximise earnings. But the expansion plans are a major plank in its attempt to fend off an aggressive bid from BHP Billiton.

Albanese's biggest obstacle is that BHP's $170 billion offer for his company is backed by some fairly compelling logic.

The company's major operations in Western Australia's Pilbara region adjoin BHP's. And the customers largely are the same. Albanese's defence strategy has centred around an argument that Rio Tinto has better growth prospects in iron ore than its rival.

His mantra is: "They need us more than we need them."

And since late last year, when the bid was made public, Rio has pulled out all stops to prove the case.

The latest expansion will involve a six-fold increase in production from the Corumba iron ore mine in Brazil at a cost of $US2.15 billion ($2.27 billion).

Since 2003, the company boasts that it has committed $US11 billion to iron ore expansion, much of it in the Pilbara.

But the expansion plans went into overdrive last year once the takeover was flushed out. Its iron ore output would be trebled to almost 600 million tonnes a year.

But this latest expansion raises the question: is Rio attempting to grow at all costs?

Mining on the site may be relatively simple. But the ore that is extracted will have to be barged 2500 kilometres down river to a point where it can be loaded on to ships. It will then be sent down the Paraguay River to a port where it will be reloaded on to larger vessels.

That makes this expensive ore to produce, which is fine when prices are running around the levels they are at the moment.

In fact, it would cost half the amount to get the same amount of extra ore out of the Pilbara. The problem with the Pilbara is that there is insufficient infrastructure to transport that amount of extra ore to port.

The other fascinating aspect to this expansion is the new ore's planned destination. The ore from Rio's expanded Brazilian operation will compete directly with that produced by Vale. Much of it will be shipped to Europe, the Middle East and other parts of South America.

At the moment, most of Rio's ore is shipped to Asia. So the focus on Europe is an interesting defence tactic. The BHP takeover requires regulatory approval in all jurisdictions in which both companies operate and Europe has emerged as the main sticking point.

Until now, Europe has not been a big market for either BHP or Rio Tinto. Of the 160 million tonnes or iron ore Rio pulled out of the Pilbara last year, only 6 million were sent to Europe. Half the total was sent to China, with Japan following up on 53 million tonnes.

BHP, however, has targeted Europe as a key growth area which is why European competition regulators have so much sway on whether the deal gets over the line.

The argument all gets down to pricing power.

BHP argues that taking control of Rio will not give it the ability to set prices as Vale is the biggest supplier to Europe. But if Rio plans to ramp up shipments to Europe, and therefore become a more important supplier, the European authorities could be convinced that three suppliers are better than two.

Iron ore pricing used to be a fairly simple affair. The first producer to set a price with a steel mill was adopted by the industry as the benchmark price for the year. Not any more.

This year Rio successfully fought the Chinese for a premium on Pilbara iron ore, a price well above that negotiated by Vale.

Rio's stand with China has thrown the pricing mechanism out the window and there are any number of games now being played on pricing.

BHP has told the Europeans that it will supply ore at a discount because of the higher shipping costs, an interesting tactic when you are trying to get one of the world's biggest takeovers approved.

Rio on the other hand is telling customers that the price of its iron ore is based at the port and they have to pick up the shipping costs, which are a hell of a lot less when you are shipping from Brazil to Europe than from Australia.

While the takeover has already been given the green light by the US Department of Justice, European authorities are dithering. Europe's steelmakers are a powerful lobby group.