UPDATE 3-JFE cautious on Asia steel outlook, despite profit

* Q2 recurring profit 9.8 bln yen vs 146.51 bln yen y-ago

* Annual outlook lags market consensus

* Shares down 2.2% after results, broader market up 0.8% (Recasts throughout, adds company comment, details)

TOKYO, Oct 26 (Reuters) - JFE Holdings Inc 5411.T, the world's No.6 steelmaker, reckons Asia's steel market is still too fragile for it to upgrade its annual profit forecast, despite a return to profit in the last quarter that beat its own forecast.

That caution prompted investors to sell down JFE shares on Monday, and was in contrast to a more upbeat view of the industry from one of its leading Asian rivals, South Korea's POSCO 005490.KS, which ranks fourth globally.

POSCO, predicting a 17 percent rise in its October-December operating profit, said this month the industry’s strong recovery would extend into 2010, driven by demand in emerging markets such as China and India. [nSEO240394]

JFE said market conditions in Asia remained opaque, with mills in China, the world’s biggest producer, boosting output and squeezing export prices, while South Korean rivals add new capacity. [nT227417]

“We’re not sure if the market will continue to improve,” JFE’s Executive Vice President Kohei Wakabayashi told a news conference. “There’s also a question of how long the impact of government stimulus measures that bolstered demand will last.”

JFE stuck to its forecast for recurring profit of 40 billion yen for the year to March, below a consensus estimate for 47.9 billion yen in a poll of 18 analysts by Thomson Reuters I/B/E/S.

“Its full-year forecast seems a little conservative given that steel demand for cars is rising,” said Kazuyuki Terao, chief investment officer at RCM Japan Co. “But we cannot become bullish as Korean steelmakers are scheduled to raise output next year.”

JFE competes with world No.2 Nippon Steel Corp 5401.T, third-ranked Baoshan Iron and Steel 600019.SS and POSCO.

JFE booked 9.8 billion yen in July-September recurring profit before tax and special items as it cranked up output on the back of a government-backed boost for car sales.

That was well below a year-earlier profit of 146.51 billion yen but better than its own forecast in July for a 2.8 billion yen loss.

Wakabayashi said JFE maintained a forecast for October-March crude steel output of 13 million tonnes, up from 12 million tonnes in the first half.

After the results, JFE shares hit an intraday low of 3,110 yen, and ended Monday trading down 2.2 percent at 3,130 yen.

The stock had risen nearly 40 percent this year outshining bigger rival Nippon Steel as the market cheered JFE’s strong exposure to Asia’s export market and lower cost base.

“Maybe it’s time we stood back from JFE shares for a while after the robust rise, but we haven’t changed the view that the global steel market is on a recovery track,” said Minoru Matsuno, president of Value Search Asset Management.

Asia’s steelmakers are expected to see sequential earnings growth by the year-end, helped by an upturn in demand and lower input costs, although earnings momentum could slow in the current quarter due to oversupply in China.

The World Steel Association this month forecast steel demand would fall 8.6 percent this year, a much smaller drop than the 15 percent it predicted in April. [ID:nPEK171738]

Japanese steel mills’ profits will be well below those of Asian peers this year as annual changes in raw material costs triggered big inventory writedowns, mostly in April-June. The Japanese have tougher asset impairment accounting rules than their rivals.

Nippon Steel, Kobe Steel Ltd 5406.T, Sumitomo Metal Industries Ltd 5405.T, Baosteel and India's Tata Steel Ltd TISC.BO report quarterly earnings later this week. (Additional reporting by Nobuhiro Kubo; editing by Ian Geoghegan)