UPDATE 2-Japan steel output down for 2nd month, pickup seen

* July output falls 1.4 pct vs June to 9.22 mln tonnes

* May recover soon ahead of demand pickup in China

* Production up 20.4 pct yr/yr, ninth straight annual rise (Recasts, adds comment, background)

By Yuko Inoue

TOKYO, Aug 20 (Reuters) - Japanese steel output fell for the second month in a row in July as producers cut back during slack seasonal demand although a pickup is seen later this year as analysts expect top export market China to restock.

Japanese steelmakers like Nippon Steel Corp (5401.T), the world's fourth-biggest, and No.5 JFE Holdings Inc (5411.T) now derive nearly half of their steel revenue from exports, though domestic demand remains weak as the economy is likely to see further weakness after slowing to a crawl in the second quarter.

"We have seen a recovery in construction steel prices, but those of sheet steel, in which Japanese steelmakers have an edge, are still at low levels," said Akira Kishimoto, an analyst at JP Morgan.

Japanese steelmakers are selling high-end steel sheet used in cars, consumer electronics and tins in Asia, where where there is a shortage of such capacity.

"A recovery in Japanese steel exports may not come until after the end of this year," said Kishimoto.

The country's crude steel output, which is not seasonally adjusted, dropped 1.2 percent from June to 9.22 million tonnes in July, the Japan Iron and Steel Federation said on Friday. That followed a 3.8 percent month-on-month fall in June.

Still, Japan's steel output rose 20.4 percent from a year ago, marking its ninth straight monthly gain, the trade body said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphic on crude steel output trends: link.reuters.com/pes26n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

OFF-PEAK SEASON

"Globally, we are in a traditionally off-peak season for steel production and consumption, so it's not a surprise for me to see Japan's production figure continue to fall until maybe the end of this quarter," said Judy Zhu, commodity analyst at Standard Chartered Bank.

Zhu said steel prices, which have been mostly on a downtrend since mid-April as China reined in its red-hot property market, should fall further to reflect seasonally weaker demand and for producers to keep cutting output.

"But I really expect this to end very soon, around mid- to late September, when we're going to see restocking worldwide ahead of a pickup in real demand in the fourth quarter," she said.

Anticipating stronger demand, two of China's biggest steelmakers, Wuhan Iron & Steel Co Ltd (600005.SS) and Anshan Iron and Steel (0347.HK) (000898.SZ), have raised their prices by up to 1,000 yuan ($147) per tonne for September bookings. [ID:nTOE67G00X]

China's steel output could top 600 million tonnes this year, exceeding last year's record 568 million tonnes which was six times bigger than the world's No. 2 producer Japan. [ID:nTOE66K02E]

AUTOMOTIVE DEMAND SOLID

Domestic demand for automotive steel sheet and plates used in construction machinery remains high, while demand for industrial machines are gradually recovering, industry officials said.

"Plate processors in Japan are very busy now, operating at full capacity," said Toshiya Adachi, executive managing officer at Mitsui & Co Steel Ltd. (8031.T)

Most of those construction machinery and machine tools are sold to China and other export markets.

However, demand for steel used in domestic construction remains lacklustre.

Adachi said demand for structural steel used in buildings is expected to halve to 4 million tonnes this year from an annual 8 million tonnes in the last few years and from a peak of 12 million tonnes in the early 1990s. (Additional reporting by Manolo Serapio Jr. in Singapore; Editing by Ed Lane)