UPDATE 1-GrafTech Q2 profit tops Street; sees tough year ahead

* Q2 adjusted EPS $0.12 vs est $0.04

* Rev down 50 pct

* Says Q3 will be weaker than Q2

* Steel producers continue to operate at very low rates

July 30 (Reuters) - GrafTech International Ltd (GTI.N), a maker of graphite electrodes, reported better-than-expected second-quarter profit, but said it sees a challenging year for its industrial materials and engineered solutions segments.

Net loss was $37.1 million, or 31 cents a share, compared with net income of $45.9 million, or 41 cents a share, a year ago. Excluding items, the company earned 12 cents a share.

Net sales halved to $158 million, due mainly to lower volumes. The company said the destocking that has occurred throughout the steel supply chain has led to an extremely tough operating environment for many companies, including Seadrift, which is GrafTech's non-consolidated affiliate.

Analysts on average were expecting earnings of 4 cents a share, before special items, on revenue of $145.5 million, according to Reuters Estimates.

Looking ahead, the company said its third-quarter results would fall below second-quarter levels as graphite electrode sales volume will be hurt by low European steel operating rates due to the normal European August holiday season. GrafTech's electrodes are built into electric arc furnaces to recycle scrap metal into steel, a method that accounts for about one third of the global steel output.

Steel producers continue to operate at very low rates in order to reduce inventory levels to match current market demand, the company added.

GrafTech, however, said it expects an improvement in fourth-quarter results as customers should have largely completed inventory destocking initiatives.

Shares of the company closed at $11.93 Wednesday on the New York Stock Exchange. (Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Anil D'Silva)