TOKYO - Second-ranked steelmaker Nippon Steel Corp said it would resume operations at the world's biggest blast furnace as it ramps up production in response to a gradual recovery in demand, surprising some in the market.

The firm said on Tuesday the furnace at its Oita plant in southern Japan would come back on stream on Aug. 2. Group output of crude steel would likely jump 40 percent in July-September from the previous quarter to over 6.5 million tonnes as carmakers and other manufacturers have started to replenish stocks.

That would mean the company, the world's no.2 producer behind ArcelorMittal, recovering nearly 80 percent of its output level of a year ago.

Steelmakers worldwide have taken a beating this year as demand slumped due to the global economic downturn, operating at severely reduce capacity usage rates, shelving investment plans and laying off workers to weather the industry's biggest downturn since World War Two.

Nippon Steel said its inventory overhangs will also be wound down by the end of September, while rising demand in export markets was a good sign, the company said.

But the restart surprised market watchers and rivals, who said demand was still weak and had thought mills currently not on stream would be kept shut until after the turn of the year.

I don't know why they are restarting the mill at this time, said Takashi Murata, analyst at Daiwa Institute of Research. It would be more efficient to boost run rates at other plants now in operation.

The schedule of the restart was much faster than we had anticipated, said an official of a rival company, who asked not to be identified.

JFE Holdings Inc, the world's fifth-biggest steelmaker, said it had not yet decided when it would restart two mills it had mothballed.

 Nippon Steel said that, while demand has yet to fully recover and the longer-time outlook is still unclear, restarting a mill would boost the group's production efficiency.

It's difficult to cope with a gradual rise in demand in a flexible manner when only seven blast furnaces are up and running, a Nippon Steel spokesman said.

The Oita furnace has an average annual output of 3.6 million tonnes, accounting for some 13 percent of Nippon Steel's production from its nine blast furnaces, all of which are in Japan.

Oita has been shut since February after a plunge in demand forced the company to cut output by 40-45 percent in the January-March quarter from a year earlier.

Nippon Steel is expected to tumble to a huge loss in April-June, hurt by lower output and a large paper loss related to inventory valuations.

It will announce first-quarter results on July 29.

(Reporting by Yuko Inoue; editing by John Stonestreet)