UPDATE 2-Norsk Hydro sees solid demand, stable inventories ahead
* Q2 underlying EBIT NOK 518 mln vs 401 mln seen by analysts
* Inventories expected to remain stable in 2013
* Sold forward 50 pct of Q3 volume at $1,850/tonne
* Repeats demand outlook of 2-4 pct growth outside China (Adds CEO, analyst, share)
By Victoria Klesty
OSLO, July 18 (Reuters) - Norsk Hydro, one of the world's biggest aluminium producers, said it expects solid growth in demand this year to help to reduce oversupply that has put prices under pressure and hit profits.
Aluminium prices have dropped to levels not seen in four years, with London Metal Exchange (LME) prices down some 13 percent this year to just above $1,800 per tonne. But rising premiums on physical delivery keep producers' afloat despite estimates about a third of the players run production at a loss.
"We have considerable inventories, but now on a stable level, and indications are that there is a tight physical market since we have record high ingot premiums," Norsk Hydro Chief Executive Svein Richard Brandtzaeg told Reuters on Thursday as the company presented its second-quarter earnings.
"I don't want to speculate where the development is going, but it looks set to be an improvement in this situation as we now have a better balance between demand and supply."
The Norwegian firm's underlying operating profit fell to 518 million crowns ($86.30 million) from 531 million crowns in the year-ago period, beating expectations for 401 million crowns seen by analysts. The profit drop was mainly caused by the fall in aluminium prices. Shares were down 0.3 percent at 0758 GMT.
Ingot premiums - the price customers pay above the LME price - are currently at around $250-$300 per tonne which together with cost cuts have protected Hydro's primary metals business from going into the red.
The unit outperformed expectations in the quarter, compensating for increasing losses in the Bauxite and Alumina division. As well as low contract prices, profits were also hit by a power outage at its Brazilian Alunorte refinery.
Norsk Hydro declared force majeure after the Alunorte alumina refinery, the world's largest, experienced the outages last month, leading to lower production. Output is expected to be hit in the third quarter as well.
Hydro repeated on Thursday that it sees global primary aluminium demand, excluding China, up by 2-4 percent this year, after hitting a low in 2012. Brandtzaeg told a news conference the company sees demand growth in China of 8-10 percent.
It said overall demand in Europe was expected to be stable, while there were signs of growing demand from the building and construction market in the United States.
Commenting on the Hydro's earnings, Hans-Erik Jacobsen, an analyst at Swedbank, said: "The numbers have come down, but what is positive is that Hydro delivers on the primary metals business in spite of lower prices, and that shows that the cost cuts are starting to take effect."
"Many of the world's producers are racking up losses, but we still haven't seen enough of curtailments," he said.
Hydro said it had sold forward around 50 percent of its expected primary aluminium production for the third quarter of 2013 at a price level of around $1,850 per tonne, excluding volumes from its Qatalum plant in Qatar. ($1 = 6.0026 Norwegian crowns) (Reporting by Victoria Klesty; Editing by Balazs Koranyi and Pravin Char)
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