UPDATE 2-POSCO sees extended output cut, in Toyota supply deal

(Recasts with forecast, output plan, confirmed Toyota deal)

By Miyoung Kim

SEOUL Jan 12 (Reuters) - South Korea's POSCO (005490.KS), the world's No. 4 steelmaker, said on Monday it may have to extend its first ever output cut through the current quarter as a deepening economic slowdown reduces demand for everything from autos to home appliances.

POSCO's downbeat comments on steel industry comes as Rio Tinto (RIO.AX) (RIO.L) indefinitely postponed on Monday the $2.15 billion expansion of its iron ore mine in Brazil and steelmills worldwide step up output cuts. [ID:nSYU005813]

But the news from POSCO was not all bad, with the company securing a deal supply steel for Toyota's (7203.T) Japanese plants, a first for the South Korean steel maker.

Expectations for a steel recovery have gathered a momentum in recent weeks, with Asian steel prices rising 13 percent from a two-year low in late November, as global output cuts tightened market conditions and forced buyers with low inventories to accept price hikes by some producers.

Some Chinese mills have even raised run rates to ride the mini boom and as the government's massive stimulus package stoked optimism for battered steel prices, which nearly halved from record highs in July last year.

"I will be very relieved if we can confirm the bottom of the steel industry cycle in the first half," POSCO CEO Lee Ku-taek told reporters on the sidelines of a steel industry gathering.

"I think we need to extend the current production cut probably for a few months. Probably it will last until the end of the first quarter."

Last month POSCO announced its first-ever output cut by slashing production by 200,000 tonnes in December and another 370,000 tonnes in January. The cuts average around 10 percent of monthly production and 2 percent of its annual output.

POSCO chief financial office Lee Dong-hee told reporters that its January steel sales were expected to fall by 27 percent to around 1.9 million tonnes from its previous average of around 2.6 million tonnes on weak demand.

TOYOTA DEAL

On the positive side, a POSCO spokeswoman said the company had agreed with Toyota Motor to supply steel for auto production in Japan as the world's top auto company seeks to cut costs as it heads for its first-ever annual operating loss.

The South Korean firm has steel supply contracts with all major Japanese car makers for their Japanese output except Toyota.

No details on prices or volumes were given.

POSCO, which earns around 70 percent of its revenue in the domestic market, sells its products at a relatively low price compared to regional rivals and a weaker won currency is also helping it gain price edge in the overseas market.

"The deal will be positive for POSCO as it will add a stable customer base at a time when domestic demand for cold-rolled steel is sure to decline," said Eom Jin-seok, a Kyobo Securities analyst.

The move is also likely to help Toyota, the biggest single customer of the world's second and third largest steel firms -- Nippon Steel (5401.T) and JFE (5411.T) -- press for a cut in steel supply prices.

The Nikkei business daily reported last month Toyota planned to ask Nippon Steel and other steelmakers for a price cut of about 30 percent in light of slower steel and vehicle demand.

Toyota plans to halt output at its domestic plants for 11 days in February and March, while South Korea's top auto firm Hyundai (005380.KS) plans to cut domestic output by up to 30 percent in the first quarter as drivers put off big-ticket buys, leaving dealers' lots full of unsold cars.

Shares in POSCO closed down 3 percent at 383,000 won, lagging a 2 percent drop in the broader market .KS11. Japanese markets are closed on Monday for the Coming of Age day holiday. (Reporting by Miyoung Kim; Editing by Lincoln Feast)