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TOKYO, July 31 (Reuters) Nippon Steel Corp., the world's third-biggest steelmaker, and Kobe Steel Ltd. on Monday reported stronger-than-expected quarterly profits on higher shipment volume and robust non-steel businesses, raising prospects of earnings overshoots in the first half.

After a two-year run of record profits, Japan's top four steelmakers predict profits for the year to March 2007 will fall by 7 to 18 percent, after booking big appraisal profits on steel inventories last year following a surge in raw materials costs and a boost in steel prices.

But earnings are now trending higher as steel prices rebound in Asia and in Japan and Japanese firms raise output of high-end steel in a bid to reduce exposure to the volatile general-use commodity end of the market.

''These numbers (for Nippon Steel) are probably ahead of the company's projection and this is positive,'' said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co. ''The numbers certainly can raise expectations going forward.'' Takashi Murata, analyst at Daiwa Institute of Research, said: ''The strong profit in the first quarter, when the market environment was weak, raises prospects of large upward revisions to their first-half earnings in September.'' Nippon Steel, the biggest beneficiary of strong worldwide sales of Japanese cars, said pretax recurring profit before special items dropped 19.6 percent to 123.08 billion yen ($1.07 billion) in the April-June quarter.

When the effect of strong inventory value and other temporary factors last year was excluded, it said, its profit rose 8.8 percent due to higher shipment volume and production of high-end steel products.

Nippon Steel's steel inventory value increased 83 billion yen last business year, leading some analysts to believe its profit in April-June this year could fall as much as 40 percent.

Diversified steel maker Kobe Steel's pretax recurring profit rose 13.1 percent during the three months to 47.24 billion yen on strong demand for its machines, aluminium and copper products and construction machinery.

The strong result pushed its shares up to the day's high of 349 yen, after the announcement, up 2.3 percent. The stock closed up 1.47 percent at 346 yen, while Nippon Steel shares finished down 1.55 percent at 446 yen.

The iron and steel index inched down 0.05 percent.

JFE HIT BY ASIA SLUMP Steelmakers' annual price talks with clients such as Toyota Motor Corp. and Mitsubishi Heavy Industries Ltd. on high-end automotive sheet steel and shipbuilding plates are yet to be finalised, prompting steelmakers to say they would not revise full-year earnings forecasts until September.

Nippon Steel sees full-year profit of 460 billion yen, while Kobe predicts annual profit of 145 billion yen.

JFE Holdings Inc., the world's fourth-largest steel maker, last week said its quarterly pretax recurring profit fell 21.6 percent to 91.44 billion yen due to higher inventory values last year and a fall in export prices.

When the effect of special factors is excluded, its profit was down 5 percent, the company said.

JFE is the most exposed among the four firms to downside weakness in average prices in the Asian market due to a higher ratio of steel exports.

Sumitomo Metal Industries Ltd., Japan's third-biggest steel maker, was the only maker among the four that posted a profit gain and raised its full-year forecast on strong demand for its high-end pipes used in oil wells.

Sumitomo inched up its full-year estimate by 4 percent to 270 billion yen after it said its pretax recurring profit rose a stronger-than-expected 10 percent during the quarter.

A rebounding steel price is also brightening outlooks of Asian steel giants. South Korea's POSCO Co. earlier this month reported a 44 percent fall in quarterly profit, but raised its 2006 crude steel output estimate, saying it expected global steel markets to be solid.

Baoshan Iron&Steel Co., China's top steel maker, in April reported a 55.4 percent fall in first-quarter earnings, but analysts said recovering steel prices should help profits in the next few quarters.

Shares in Nippon Steel fell 5 percent in April-June, beating a 7.8 percent fall in the iron and steel sector index. Kobe slipped 19.9 percent.

''The steel sector is still attractive as share prices have already factored in a 20 percent or so decline in profit this business year,'' said Junichi Misawa, senior fund manager at STB Asset Management.

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