UPDATE 3-POSCO Q2 at 9-yr low, sees strong rebound in H2

* Revises up 2009 crude steel output target by 6.4 pct

* Sees H2 underlying profit nearly quadrupling from H1

* Chinese rival Baosteel raises August steel prices

* here

* Shares close down 1.3 pct ahead of earnings release (Adds company comments, details)

By Miyoung Kim

SEOUL, July 13 (Reuters) - South Korea's POSCO (005490.KS), the world's No.6 steelmaker, expects second-half earnings to nearly quadruple as rising steel prices and improving demand from auto makers and other manufacturers help the industry recover from its toughest environment in decades.

The worst may now be behind most Asian steelmakers, which had to cut output by as much as 50 percent in the first half, as manufacturers have now started to replenish low inventory, boosting prices by around 15 percent from recent lows in April.

But a strong rebound in steel output worldwide is threatening to reverse the recovery, as demand has yet to fully recover amid fragile signs of a global economic rebound.

Many Chinese mills are already running almost at full capacity, while Japan's Nippon Steel (5401.T), the world's No.2 steelmaker, also plans to raise output around 30 percent this quarter from the previous quarter, threatening to cap recent price rebounds.

"Overall price trend is on the rise but what worries us most is that global mills rush to increase output sharply in the second half and that could deter price recovery," Hwang Eun-yeon, senior vice president of marketing at POSCO said after the company posted a 91 percent fall in second-quarter profits.

POSCO expected global steel prices would show a modest gain in the second half as automakers increase output and demand from China improves. The world's largest steel consumer, China is spending nearly $600 billion on an infrastructure-focused stimulus package.

CHINESE PRICE HIKE

Reflecting growing optimism for the steel sector, China's Baosteel (600019.SS), the world's No.3 steelmaker, raised August prices for its major products by 9 to 13 percent, traders said on Monday. [ID:nSHA358658]

"It looks like earnings have hit the bottom but the pace of recovery in the future will depend on supply control, such as a possible restructuring," said Kim Hak-kyun, an analyst at Korea Investment and Securities.

POSCO, which competes with Nippon Steel, JFE (5411.T) and Baosteel, raised its 2009 crude steel output target by 6.4 percent to 29.8 million tonnes and gave its first guidance for 2009 operating profit at 2.6 trillion won ($2 billion).

The figure suggests second-half profit would top 2 trillion won, up sharply from 543 billion won in the first half, as it cranks up production using cheaper raw materials and as global steel prices rebound.

The firm cut second-quarter steel output by 15 percent from a year ago to 7.1 million tonnes, but that marked a 16 percent rise from the first quarter, when production fell by a quarter.

POSCO, the first major Asian steelmaker to report results, is faring better than rivals such as top-ranked ArcelorMittal (ISPA.AS) and Nippon Steel, which have made output reductions of around 40 percent early this year.

Japanese steelmakers including Nippon and JFE are the biggest casualties of the downturn in Asia and are seen reporting heavy losses later this month, hit by price cuts and reduced demand from the auto industry, their main customer. [ID:nSEO3184]

LOWEST PROFIT IN 9 YRS

POSCO's April-June operating profit tumbled 91 percent to 170 billion won, the lowest since it started releasing quarterly results in 2000 but in line with an average forecast for 172 billion won by 12 analysts.

Net profit was 431 billion won, sharply above the 197 billion won forecast, thanks to increased foreign exchange related gains, while sales dropped 15 percent to 6.34 trillion won due to record steel price cuts in May and reduced output.

In May, POSCO agreed to cut fine iron ore prices by a third and coking coal prices by around 60 percent with Australian suppliers for 2009 contracts.

Shares in POSCO closed down 1.3 percent on Monday ahead of the earnings release, outperforming a 3.5 percent drop in the broader market .

The cost of buying protection against default by POSCO on its debt has fallen in recent months, with its 5-year credit default swap (CDS) spreads tightening to 147 basis points at the end of last week from 419 points in the first week of March, according to CDS data provider Markit. ($1=1290.9 Won) (Additional reporting by Rhee So-eui; Editing by Lincoln Feast)