* South Flank mine will start production in 2021
New mine has better ore, which fetches premium in China
* Japan's Itochu, Mitsui to spend $510 mln in total (Adds comment from head of BHP Minerals Australia, changes date in dateline)
LONDON/MELBOURNE, June 15 (Reuters) - BHP on Thursday approved $2.9 billion in spending to build a new iron ore mine in Australia, the top global miner's biggest investment commitment in seven years.
The South Flank mine in the state of Western Australia is due to produce its first ore in 2021, replacing the 80 million tonnes-per-year Yandi mine.
The move is set to improve the quality of ore offered by BHP as it looks to earn more from China, the world's biggest buyer of the steelmaking commodity.
Mining executives say China is increasingly demanding high quality ore, which commands a premium and limits pollution as less ore needs to be processed, although an analysis of Reuters data shows the country is struggling to obtain it.
"We wanted to target an opportunity that would allow us to play to that continued strength in demand for higher quality ore," BHP's Minerals Australia President Mike Henry told reporters on a conference call from London.
Henry said BHP had long anticipated that shift in demand for higher quality iron ore and coking coal, as China moved its steelmaking blast furnaces to the coast, relied more on bigger blast furnaces and focused on the environment.
Ore from South Flank would have an average iron content of 62-63 percent compared to Yandi's 58 percent, lifting the proportion of BHP's output of higher valued lump product to 35 percent, Henry said. It would also have lower amounts of phosphorus, an impurity that fetches a discount.
BHP has an 85-percent stake in the South Flank project.
Its Japanese partners Itochu Corp, with an 8 percent stake, and Mitsui & Co Ltd, with 7 percent, will spend $270 million and $240 million respectively, bringing the total development cost to $3.4 billion, they said.
The investment comes at the same time as Rio Tinto, the world's No.2 iron ore miner, is expected to decide soon on whether to build its Koodaideri mine in Australia at an estimated cost of $2.2 billion.
Fortescue Metals Group has just approved development of a $1.3 billion project, Eliwana.
Henry said BHP had a slight head start in securing equipment for its project.
"We are going to see a bit of pressure in the market as a result of multiple projects being pursued at the same time. We're pretty well positioned, given the timing of our full sanction," he said.
(Reporting by Barbara Lewis and Sonali Paul; Additional reporting by Yuka Obayashi in TOKYO Editing by Alexandra Hudson and Joseph Radford)