At first glance, banking on the future of iron ore doesn’t appear like the smartest move.

With prices for iron ore about half what they were a year ago and the economy for the key market, China, slowing, the outlook doesn’t look good.

Profits at the mining companies have taken a beating. At Rio Tinto, net profit for the half year was down 82% to $US806 million. BHP’s full year attributable profit was down 86.2% to $US1.91 billion.

Atlas Iron, which posted a $1.4 billion loss for the 2015 financial year, started mothballing its mines because it cost more to dig up the ore than it was being paid. It later resumed after doing deals with its suppliers to cut costs.

However, Rio Tinto, with about 60% of its business in iron ore, sees opportunity ahead.

It revealed its thinking this week during an investor presentation in Sydney.

It has been rapidly bringing down the cost of producing one tonne of iron ore. This means it can compete in a low price environment better than smaller players such as Atlas.

And it’s banking on some of the smaller players, which can’t match Rio’s low production prices, fading from the scene, and therefore reducing supply and supporting iron ore prices.

Rio Tinto also sees strong demand for steel, of which iron ore is the main component, in China. It bases this on that fact that China’s per head consumption of steel is still very low by world standards.

And China needs to replace a lot of buildings over the coming decades. Rio says nearly 25% of the current urban residential building stock will be demolished and rebuilt by 2030.

The number of China passenger vehicles will rise by 280 million by 2030, a nearly threefold increase. Each car has about 900 kg of steel.

Rio’s key assumptions underpinning its forecasts for iron ore demand:

• Global steel demand will grow by around 2.5% per year between now and 2030.

• Global iron ore demand will increase to three billion tonnes in 2030.

• Chinese crude steel production is expected to reach around one billion tonnes by 2030.

• 220 million Chinese are expected to urbanise in the next 15 years, compared with 320 million between 2000 and 2015.

• 120 million tonnes in marginal iron ore supply is expected to exit the market in 2015 with a further 45 million tonnes at risk of exiting.

And here’s how Rio has been pulling down the cost of producing a tonne of iron ore.