* Sees world demand ex-China up 2-4 pct in 2014
* Expects demand to strengthen over next 10 years
* Sees 2014 capex of NOK 4.3 bln, up 39 pct from 2013
* Shares down 0.9 pct
By Henrik Stolen and Gwladys Fouche
OSLO, Dec 5 (Reuters) - Norsk Hydro, one of the world's largest producers of aluminium, will increase capital expenditure by almost 40 percent next year to modernise equipment in expectation of accelerating global demand over the next decade.
The company's optimism was tinted with caution, however, as it introduced the latest in a string of cost-cutting programmes after the global economic downturn hit industries from automakers to builders and brought a steady decline in benchmark aluminium prices in recent years.
Norsk Hydro expects an improving demand outlook to take hold next year and said it would lift capital expenditure to 4.3 billion crowns ($700 million) from an estimated 3.1 billion crowns in 2013.
"World aluminium demand outside China is estimated to grow 2 percent in 2013 and 2-4 percent in 2014," the company said in a statement ahead of a capital markets day. "The global aluminium market is expected to show solid long-term growth of 4-6 percent annually over the next 10 years."
The extra expenditure will be used to modernise key equipment at several aluminium smelters, Chief Executive Svein Richard Brandtzaeg said.
So far Norsk Hydro has had a poor return on capital expenditure compared with its peers.
While the weighted average on this measurement was 2.0 for the industry, Norsk Hydro's ratio was 0.8 while rival Rusal's was 2.6 and Alcoa's was 1.8, according to Deutsche Bank.
The company also said it will maintain its dividend level for the year. It is expected to pay out 0.75 crowns per share, according to a Reuters poll of analysts.
JPMorgan analysts consider the stock an "avoid" and said in a note to clients that Norsk Hydro's guidance on capital expenditure and the flat dividend are "likely to disappoint the market".
Shares in Norsk Hydro were down 0.9 percent at 1432 GMT, slightly lagging the Oslo benchmark index down 0.14 percent.
Though the company said it had finished with a previous plan to cut costs by $300 a tonne at the aluminium smelters it fully owns by the end of 2013, it said on Thursday that it remains committed to lowering its cost base.
It will press ahead with plans for 1 billion crowns of costs at its bauxite and alumina division by 2015 and announced another programme for its primary metals division, targeting savings of $180 a tonne for its joint-venture smelters by the end of 2016.
The firm's outlook for worldwide supply was cautiously optimistic. With low aluminium prices - prices on the London Metal Exchange have almost halved to below $1,800 a tonne from their 2008 peak of $3,380 - Hydro expects lower supply growth ahead as producers reduce output.
"Going forward we see a more limited supply growth and there are some signs that new capacity is slowing down. Looking ahead we expect this to continue in 2014", Brandtzaeg told the investor conference.