It is the big question hanging over the price of iron ore – how much high-cost supply in China and other countries will need to close to balance the market?

Rio Tinto weighed into the debate on Thursday telling investors that because of weaker prices there had already been significant curtailments (around 85m tonnes) of iron ore supply from China as well as reductions from non-traditional suppliers such as Indonesia and Iran.

“Approximately 125m tonnes of high-cost iron ore supply is expected to exit the market in 2014, as lower-grade producers from China and less traditional supply countries curtail production,” the company said alongside half-year figures. “This is expected to offset the impact of new supply to seaborne markets during 2014 from Australian and Brazilian producers.” The price of benchmark 62 per cent iron ore has fallen 29 per cent to $96 a tonne this year.

Clearly, Rio Tinto is not a disinterested observer – the Anglo Australian miner makes most of its money from iron ore. It also needs the price of the key steelmaking commodity to remain firm if it is to return a large slug of cash to shareholders next year.

Many analysts are sceptical of Rio’s forecasts, arguing a large domestic source of iron ore is strategically important for China, as are the associated employment benefits.

Liberum, for example, reckons Rio’s assumptions are an attempt to justify its decision to push ahead “aggressively” with the expansion of its operations in Western Australia. Rio has lifted annual production capacity in the Pilbara from 240m tonnes to 290m in a year and is aiming for 360m.

“We think production will prove to be more sticky than that and most of the price elastic supply will come out this year (around 60m tonnes at the moment) meaning the price buffer will be much less in 2015 when another 130m tonnes hits the market,” Liberum said in a note to clients.

Still, no one should doubt Rio’s intention to make life difficult for high-cost and other suppliers.

“Now it’s not a time for one of the best iron ore producers in the world to take a step back. Now it’s time for others to really feel the consequence of the price against their operating costs and to then make decisions,” Sam Walsh, chief executive, said in the wake of the results.

Miners that produce lower grade ore (56-58 per cent iron content) could also be squeezed out of the market as Rio and rivals such BHP Billiton and Vale continue to ramp up production. This is partly because of tough new environmental laws in China that are forcing steel mills to go “upmarket” and source more higher-grade ore from Rio and its peers.

“This reduces the amount of energy, it reduces the amount of slag they produce. Hence . . . they improve their environmental performance,” explained Mr Walsh.

The response from low-grade producers, which need to generate cash to service and pay back their debts, has been to discount aggressively to win business in what Mr Walsh calls a “cost trade off” with the Chinese mills.

However, that is not something that can go on forever – particularly if the iron ore price remains below $100 a tonne. And, ominously, Rio reckons the trend is clear. “I expect as we go forward the market will continue to push for higher grade ores,” warned Mr Walsh.