* BHP Q4 iron ore output jumps 15 pct
* Coking coal output up 2 pct despite disruptions
* Warns Queensland coking coal margins squeezed
* Steps up onshore U.S. oil output in weak gas market
* BHP shares fall 0.5 pct in early trade
By Sonali Paul
MELBOURNE, July 18 (Reuters) - BHP Billiton posted strong growth in iron ore production in the June quarter and said it expects to lift Australian iron ore output by 5 percent in the 2013 financial year, despite risks of cooling demand in top customer China.
With Australia's top three iron ore producers, Rio Tinto , BHP and Fortescue Metals Group, busy expanding output, worries are growing over a profit squeeze with iron ore prices down around a quarter from a year ago as Chinese steel mills cut stocks.
"Investors are going to place increased attention on the ability of the market to absorb supply increases, particularly at a time when profitability in the steel industry is negligible," said Tim Schroeders, a portfolio manager at Pengana Capital, which owns shares in BHP and Rio Tinto.
BHP's shares fell 0.8 percent in early trade, though held up better than Rio Tinto and Fortescue, which are more heavily exposed to iron ore.
BHP reported on Wednesday a 15 percent rise in iron ore output to 40.9 million tonnes in the quarter from a year earlier, taking it to a record annual output of 159 million tonnes.
Thanks to the expansion of railway lines and the addition of new ship loading capacity, BHP was producing at a rate of 179 million tonnes a year in the June quarter, as it ramps up to reach a target rate of 220 million tonnes a year in 2014.
BHP, the world's no.3 iron ore miner behind Brazil's Vale and Rio Tinto, is due to decide by December whether to go ahead with the first stage of what could eventually be a $20 billion expansion to nearly double its iron ore capacity in Western Australia beyond 2014.
The ambitious plans come as spot iron ore prices dropped half a percent to $129.40 a tonne on Wednesday, the lowest since November, as weak Chinese steel demand pressured steel prices, curbing appetite for the raw material.
Rio Tinto reported flat quarterly iron ore output on Tuesday, while smaller rival Fortescue Metals Group posted a 54 percent jump in production, on track to reach 155 million tonnes a year by mid-2013, just behind BHP.
"It's a good result, but didn't shoot the lights out," said CLSA analyst Hayden Bairstow, predicting BHP's shares would drift lower after the result, matching what happened to Rio Tinto's shares after it gave a bearish global outlook.
FORCE MAJEURE ON COAL LIFTED
Output of coking coal, a major revenue earner for the world's biggest producer, was the least predictable among BHP's products in the final quarter of its financial year and provided the main surprise.
Coking coal production rose 2 percent in the quarter to 8.1 million tonnes from a year earlier. Some analysts had expected a drop in output due to disruptions at its Queensland mines after strikes and heavy rains, which led it to declare force majeure earlier this year.
Force majeure relieves a company from its contractual obligations due to circumstances beyond its control.
BHP said on Wednesday it lifted force majeure this month as it neared a resolution of the 18-month long union dispute over pay and conditions.
But the company BHP warned that due to the Queensland production disruptions, coking coal margins had been squeezed.
U.S. OIL PRODUCTION
BHP also reported a 10 percent rise in onshore U.S. oil production and said more than 80 percent of its onshore drilling activity was focused on the liquids rich parts of the Eagle Ford shale and Permian Basin instead of natural gas.
The onshore oil production is being closely watched due to concerns in the market that BHP badly timed its $17 billion acquisition of U.S. shale gas assets last year, just ahead of a slide in gas prices to 10-year lows.
Analysts are expecting a writedown of at least $2 billion on its shale assets when it reports annual results in August.
Copper production rose 15 percent to 312,500 tonnes in the final quarter of BHP's financial year from a year earlier and compared with a forecast of 311,200 tonnes from UBS.
BHP had flagged annual output would be shored up by a strong increase in the fourth quarter from the Escondida mine in Chile.