UPDATE 1-Nippon Steel lifts annual outlook on improved first-half margins

(Adds quotes, talks with Teck Resources, details.)

By Yuka Obayashi

TOKYO, Nov 1 (Reuters) - Nippon Steel, Japan's top steel producer, lifted its net profit forecast for the year through end-March to reflect stronger-than-expected results in the first half, helped by improved margins and higher gains from group companies.

It marks the second upward revision after an August increase and defies a slumping steel market in Asia, weighed down by high output and rising exports by the world's biggest steel producer China.

Nippon Steel, the world's No. 4 steelmaker, now expects an annual net profit of 420 billion yen ($2.8 billion), up from its August prediction of 400 billion yen. The latest guidance compares with a mean profit estimate of 399 billion yen in a poll of 11 analysts by LSEG and a profit of 694 billion yen last year.

"We face an unprecedentedly severe business environment," Executive Vice President Takahiro Mori told a news conference, noting continued excess production in China, concerns about recession in Europe and the United States, and rising raw materials prices.

But the company plans to further pursue initiatives such as product differentiation, ensuring stable production and global expansion to counter poor market condition, he said.

Nippon Steel's profitability has improved over the past few years through structural reforms such as downsizing local facilities while changing the negotiation formula with its key industry customers to swiftly reflect any change in materials costs to their product prices.

For the six months through Sept. 30, net profit declined 19.4% to 300 billion yen, but beat its earlier forecast of 200 billion yen, supported by lower-than-expected prices of raw materials.

Still, the recent surge in coking coal and iron ore prices will dent margins in the second half, Mori said.

He also said the company was still in talks with Teck Resources to invest in the Canadian miner's coking coal unit.

"We can't talk about conclusions, but we don't think it's going badly," he said.

Teck reiterated last month that separating its base metal and steelmaking coal businesses remained a "priority" and a decision was likely by the end of this year.

($1 = 151.2900 yen) (Reporting by Yuka Obayashi Editing by Sherry Jacob-Phillips and Mark Potter)