UPDATE 2-Evraz sees weaker Q3 despite rising Russia demand

* Core earnings to slip in Q3 on prices despite demand

* H1 net loss $270 million

* Russian steel mills running at full capacity

* Shares down 2.8 pct in rising London market

(Adds CFO on Reuters Insider, domestic outlook, analysts)

By Melissa Akin

MOSCOW, Sept 2 (Reuters) - Russian steelmaker Evraz Group HK1q.L expects core profit will have slipped in the third quarter, despite improving Russian demand, due to volatile prices and concerns about a sustainable economic recovery.

The weaker profit outlook and a wider-than-expected first-half net loss drove the No.2 Russian steelmaker's London-listed stock down 2.8 percent to $26.50, while the broad market .FTAS was up 0.23 percent.

Evraz, which also has operations in the United States, Canada, Italy, Ukraine, Czech Republic and South Africa, said its three Russian mills were running at full capacity, and its foreign plants had boosted capacity use.

Major Russian steelmakers increased output in the second quarter of the year, in the hope that the trend of weaker prices in the early summer months would turn around in the autumn. [ID:nLDE66E0P1]

In May, Evraz forecast a sharp rise in second-quarter earnings before interest, taxes, depreciation and amortisation (EBITDA) to $725-$825 million, after $424 million in the first quarter. [ID:nLDE64G1RW]

First-half EBITDA was $1.15 billion, suggesting the second-quarter figure was at the lower end of the range.

The company cautioned, however, that core earnings would decline in the third quarter to a $480-$550 million range.

DOGGED BY DEBT

Evraz recorded a net loss of $270 million in the first half, which it blamed on depreciation-related one-off items.

CEO Alexander Frolov told a conference call there would be no dividend for the year.

Interest expense on the company's $7.2 billion in net debt was the biggest lossmaker, Renaissance Capital said in a note.

"In our view Evraz could not avoid losses at the net profit line, taking into account the downturn in steel prices in May-June," Renaissance said.

The company must repay $1.1 billion in the next 12 months, Chief Financial Officer Giacomo Baizini told a conference call. It will refinance the full amount, though the company has $700 million in cash, he added.

"We don't really see profit or returning to profit as one of our major targets," Baizini said in an interview with Reuters Insider television. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For the Reuters Insider interview please click on link.reuters.com/byf98n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

GROWTH AT HOME

Evraz instead focused on healthy volumes, especially in Russia, where an acceleration of government-funded construction projects in particular boosted demand by 30 percent from the first half of 2009.

Key projects included infrastructure development in preparation for the APEC Summit in the Far East and the Sochi Olympic Games, Chief Executive Alexander Frolov said.

"There is potential for continued growth, because, in volume terms, the pre-crisis level has not been reached. There is another 15-20 percent to go," Frolov told the conference call.

Analysts said that may be cold comfort for investors, as the outlook for Russia's own growth dims.

"The main future driver of Evraz's equity story should be the recovery of construction activity in Russia," Citi analyst Daniel Yakub wrote.

"Recovery of the domestic construction market demand back to pre-crisis levels may take some time unless growth rates accelerate." (Additional reporting by Polina Devitt; Editing by David Cowell and Will Waterman)