(Changes subsequent references to Credit Suisse economist to Tao)

* BHP’s Q4 iron ore output up, copper down

* Full-year iron output at record 124.9 mln tonnes

* Says cautious on outlook as governments tighten belts

* Says Olympic Dam copper mine returning to normal output * Escondida copper, Cerro Matoso nickel output to drop (Adds more details, analyst quotes, updates share price)

By James Regan

SYDNEY, July 21 (Reuters) – BHP Billiton (BHP.AX)(BLT.L), the world’s biggest mining house, reported a 16 percent jump in quarterly iron ore output on Wednesday, taking annual production to a record, but cautioned over uncertainties surrounding the short-term outlook for commodities markets.

Mounting concerns of a slowdown in recovery in western economies and a waning appetite for industrial raw materials from China — the world’s top consumer of industrial metals — could hit suppliers such as BHP, Rio Tinto (RIO.AX) (RIO.L), Xstrata (XTA.L) and other sector behemoths beefing up output.

“Uncertainty surrounds the near-term prospects for growth in the developed world as governments adjust fiscal policies following a period of significant stimulus and subsequent increase in sovereign debt levels,” BHP said in its June quarter production report.

“Within China, measures introduced to reduce growth to more sustainable levels means volatility in commodity end-demand is likely to persist.”

China, which accounts for about 25 percent of BHP and Rio’s revenue, saw its economic growth moderate in the second quarter, a slowdown likely to continue for the rest of the year as Beijing steers monetary and fiscal policy back to normal after a record credit surge to counter the global crisis. [ID:nTOE66D06L]

According to Dong Tao, chief non-Japan Asia economist at Credit Suisse, the slowdown is much more severe and relevant to countries such as Australia that sell commodities to China.

“What’s behind the slowdown? There’s a drastic inventory correction in the steel sector, and that’s being led by moderation in infrastructure investment,” Tao said.

Until now, analysts have suggested mining companies needed to increase productivity to capture the booming China trade as well as returning demand in the west, particularly for iron ore.

BHP and Rio are spending billions of dollars on so-called “rapid growth projects” in iron ore mining. The two are also aiming to form a joint venture to integrate their separate iron ore businesses in Australia to improve production runs and save $10 billion in repetitive costs.

The partnership still needs approvals from competition regulators.

RECORD IRON ORE OUTPUT

The rise in BHP’s quarterly iron ore output brought annual production from the world’s third largest producer of the steel-making raw material to 124.96 million tonnes, up 9 percent.

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The world’s second-largest iron ore producer, Rio last week posted a 2 percent drop in June quarter production but still forecast record output of 234 million tonnes in calendar 2010. [ID:nSGE66D07K]

Rio ranks ahead of BHP Billiton and behind Vale (VALE5.SA) of Brazil in terms of iron ore production.

“They (BHP) are cautious but not throwing in the towel,” said Peter Chilton, analyst at Constellation Capital Management, which owns BHP shares.

“But I think they’re a little bit more cautious than Rio.”

Credit Suisse’s Tao said BHP and Rio needed to voice caution because they think there might be a mismatch between analysts’ expectations and the reality on the ground.

“Chinese demand over the next 12 to 18 months is not going to be as bullish as many people believe” Tao said. “Certainly we shouldn’t be benchmarked against China’s performance over the past five years,” Tao said.

Both BHP and Rio earlier this year threatened to curb growth in iron ore production under a 40 percent Australian “super profit” tax proposed to start in 2012. The tax has since been watered down to 30 percent, which the companies say will not stunt expansion plans.

A decline in iron ore prices has led some analysts to suggest producers such as BHP Billiton, Rio Tinto, Fortescue Metals (FMG.AX) and Vale might rethink production schedules this year. But iron ore prices were now showing signs of bottoming, according to ANZ Bank.

Spot prices .IO62-CNI=SI have remained steady at $118-$120 a tonne for the past week after falling consistently for a month. “A key positive catalyst will be a recovery in Chinese steel prices, which still continue to slide,” said Mark Pervan, head of commodities research for ANZ Bank.

BHP closed up 1.2 percent at A$38.75, outpacing more modest gains in the wider market .AXJO.

COPPER OUTPUT DROPS

BHP, the world’s second-largest copper producer after Chile’s Codelco [CODEL.UL], said fourth-quarter output dropped 5 percent from a year ago, with the company forecasting its Olympic Dam mine operating at full production in the current quarter.

Olympic Dam had been running at only a fifth of its 200,000-tonnes-a-year capacity since a mine accident in October.

It noted a strong performance during the last quarter at its 57.5 percent-owned Escondida, Spence and Cerro Colorado copper mines in Chile. But Escondida production is expected to decline by 5-10 percent this year, mainly due to mining of less rich ore.

Rio holds a 30 percent interest in Escondida, the world’s biggest copper mine. JECO Corp, a consortium formed by Mitsubishi Corp (8058.T), Mitsubishi Materials (5711.T) and Nippon Mining & Metals, owns 10 percent and the World Bank has 2.5 percent. BHP also said it was assessing the impact of the six-month suspension of oil drilling in the Gulf of Mexico after Washington in May ordered a temporary halt to 33 exploration rigs as part of a broader response to the BP (BP.L) oil spill.

Drilling at BHP’s Atlantis and Shenzi projects in the Gulf of Mexico were halted as a result.

BHP said it ran its Australian Nickel West division at record levels in 2009/10, enabling it to draw down most of a surplus stockpile of concentrate.

However, during the second half of the 2011 financial year, production from its Cerro Matoso, Colombia nickel division will drop due to a planned replacement of one of its two furnaces. (Additional reporting by Sonali Paul in MELBOURNE; Editing by Himani Sarkar)