BHP Billiton is likely to halve the first stage of its estimated $10bn iron-ore port expansion, analysts and investors said, as it looks to slash capital spending due to rising costs and an uncertain market outlook.

The outer harbour project in Western Australia is one of three mega projects in an $80bn pipeline that BHP has slowed, under pressure from shareholders who want bigger dividends and buybacks rather than expensive projects with no short-term returns.

In February, BHP committed $779m in early funding to build a 100-million tons a year outer harbour facility and said at the time it would be reviewed for full approval in the December quarter this year.

Five analysts and two investors said on Friday that BHP's incoming iron-ore chief, Jimmy Wilson, would have to cut plans for the outer harbour.

"He's been told he's got to re-cut it to a smaller project," UBS analyst Glyn Lawcock said.

They predicted the logical outcome would be to cut the first stage of the expansion to 50-million tons a year from 100-million tons a year.

Analysts and investors said given that BHP has about 50-million tons a year of extra rail capacity, the company was likely to look for ways to milk its existing mines for extra output to fill that capacity, in which case it would need only 50-million tons a year of new port capacity.

"They're looking at it as 50-million tons a year," said another analyst, who declined to be named because they were not authorised to speak to the media.

BHP Billiton declined to comment on whether its incoming iron-ore chief had been told to cut the scope of the outer harbour project. A spokesman directed Reuters to recent comments by senior BHP managers on the company putting the brakes on spending plans.

Mr Wilson's official move into the iron-ore job on July 1 created an opportunity for a review of the outer harbour plan, looking at ways to stretch the existing operations before splashing out on the massive port, analysts and investors said.

"Maybe a new pair of eyes looking at it will come up with alternative ways of doing things," said Tim Barker, a portfolio manager at BT Investment Management.

RIO TINTO EXTENDS LEAD

The outer harbour is crucial to BHP's long-term plan to nearly double its iron-ore capacity to 440-million tons a year, a project that had been expected to take eight years at a cost analysts estimated at more than $20bn.

When fully built, the development would include a 4km-long jetty, a four-berth wharf and a 32km shipping channel to handle 200-million tons a year of iron ore, adding to the 240-million tons capacity BHP is targeting in an inner harbour expansion already under way.

"Anywhere they can take smaller bites, they will," CLSA analyst Hayden Bairstow said.

Under its existing plan, analysts estimate the capital cost of the expansion would be $200 a ton of iron-ore capacity.

That puts it at a sharp disadvantage to Rio Tinto, the world's second-biggest iron-ore miner, which this week committed to spend $3,7bn to expand its Australian iron-ore operations to 353-million tons a year by the first half of 2015, up from 283-million tons, in an expansion under way.

Analysts estimate its capital cost at $160 a ton of added capacity.

In a dig at its archrivals BHP and Vale, which last year postponed its $8bn Serra Sul project by two years, Rio said its Pilbara project stacked up under any likely scenario, underpinned by Chinese demand growth.

"This demand growth is coupled with an increasingly challenged supply response, as several high-profile competitor projects have recently been either delayed or postponed," Rio Tinto's iron-ore chief, Sam Walsh, said in the expansion announcement.

BHP's shares fell 2,1% on Friday to A$31,52, hovering near a three-year low hit earlier this month.

Shareholders who have been clamouring for bigger dividends or share buybacks said they would be comfortable with a smaller outlay on the outer harbour project, if it helped improve the near-term returns.

"As an investor you want to see them get the greatest bang for their buck," BT Investment Management's Barker said.

Reuters