* Fortescue to let Downer EDI service contract expire
* Company to run Christmas Creek mine in-house
* Sees a way to cut costs (Adds quotes, details, context throughout)
By James Regan
SYDNEY, April 4 (Reuters) - Australia's Fortescue Metals Group FMG.AX on Monday continued its drive to reduce overhead amid a wary outlook for iron ore, saying it won't renew a contract with Downer EDI Ltd DOW.AX .
Mining services companies in Australia such as Downer have been hard hit by a sharp drop in the prices of iron ore, which sells for roughly a quarter of its near-$200 a tonne peak of 2011, leading more producers to self-operate.
Miners typically seek to cut costs by removing fees incurred by outsourcing. Companies also believe they are more in control by managing their own mines.
Fortescue said it would take over operations at its Christmas Creek mine in Western Australia once its outsourcing contract with Downer expires in September.
"Adoption of an owner-operator model will further reduce Fortescue's costs through ongoing improvement of the efficiency and productivity of our Christmas Creek mining operations," Fortescue Chief Executive Officer Nev Power said in a statement.
The market capitalisation of Australian mining services companies in a Deloitte index of stocks fell by $5.56 billion in the second half of 2015 versus the first half.
Australia is home to the world's single-biggest biggest iron ore deposits. Fortescue, along Rio Tinto RIO.AX RIO.L and BHP Billiton BHP.AX BLT.L , controls more than half the 1 billion-tonne-per-year global seaborne trade in the steel-making ingredient.
The Christmas Creek mine is located in the Chichester ranges in the Pilbara iron belt and, along with another mine called Cloudbreak, can produce up to 90 million tonnes of ore a year. Fortescue is forecasting overall production this year of 165 million tonnes.
Fortescue, controlled by founder Andrew "Twiggy" Forrest, announced in February its had cut its production costs by 47 percent from the prior year and forecast it would drop to $13 a tonne by the end of 2016. industry has been extremely clever about reducing costs and increasing competitiveness in a really tough market," said Simon Bennison, chief executive of the Association of Mining and Exploration Companies in Australia.
Downer confirmed that it was handing over operations at Christmas Creek, but said it did not expect the change to affect its 2016 financial results.
BHP initiated a move away from contract mining in 2011 by acquiring HWE Mining, which was operating some of its Pilbara iron ore mines.
Rio Tinto, which runs it own mines, has said it reduced working capital by 83 percent in 2015 and saw a 20 percent productivity improvement.
Iron ore .IO62-CNI=SI stood at $54 a tonne, down from a near nine-month peak of $63.30 reached on March 8.