(Adds nickel and coal production, industry context)
SAO PAULO/RIO DE JANEIRO, July 21 (Reuters) - Vale SA expects full-year iron ore output to come in at the lower end of forecasts this year, and below expectations in 2017, a sign the world's No. 1 producer of the raw material is effectively reining in production at low-margin facilities.
Iron ore output was 86.823 million tonnes in the second quarter, down 2.8 percent from a year earlier, Rio de Janeiro-based Vale said in a report on Thursday.
Production trends in the first six months suggest ore output will end the year at the lower end of Vale's forecast range of between 340 million tonnes and 350 million tonnes, the report said. In 2015, Vale produced 345.9 million tonnes of the steelmaking raw material.
Vale said it would continue to replace high-cost tonnes and expected production in 2017 to be below its previous forecast of between 380 million tonnes and 400 million tonnes.
An expected fall in annual production this year compared to 2015 comes despite an increase in output from Carajas, Vale's low-cost mining complex in the Amazon, indicating the company is successfully phasing out more expensive ore from older mines in the state of Minas Gerais.
The strategy of more controlled production growth comes after iron ore prices IO62-CNI=SI fell by about a quarter since 2014. Prices fell to their weakest on record late last year, before recovering by around 50 percent, but analysts say the market will remain oversupplied for the foreseeable future.
This has resulted in slower growth, or reduction, in output across the board. Rivals BHP Billiton Ltd and Anglo American Plc both reported slight setbacks in their iron ore production this week.
Vale also reported a rise in nickel production in the second quarter to 78,500 tonnes, up 17 percent from the same period last year, due to improved performance at mines in Indonesia and Brazil.
In contrast, coal production fell 25 percent to 1.5 million tonnes due to parts of the underground Carborough Downs mine in Australia collapsing in May, causing production to be stopped. (Reporting by Guillermo Parra-Bernal and Stephen Eisenhammer; Editing by W Simon and Bernadette Bayn)