UPDATE 2-Schnitzer Q4 profit tops market; sees weak Q1 demand

* Q4 EPS $0.36 vs est $0.31

* Q4 rev falls 58 pct

* Sees a sequential drop in Q1 ferrous sales

* Shares fall 7 percent (Recasts, adds conference call details, analyst's comment)

Oct 27 (Reuters) - Schnitzer Steel Industries Inc (SCHN.O) posted a quarterly profit above analysts expectations, but revenue more than halved as lower prices and sales volumes hurt its key metals recycling business.

Shares of the company, which recycles ferrous and non-ferrous scrap metals, were down 7 percent at $47.85 Tuesday afternoon on Nasdaq.

"In the near-term, demand is softening, and sales prices have declined in recent weeks in both domestic and in export markets," Chief Executive Tamara Lundgren said on a conference call with analysts.

The company expects first-quarter ferrous sales volumes at its metals recycling business to decline one-third sequentially, and sees flat margins as price increases may be offset by higher inventory costs.

"We think there is substantial risk to the fiscal first-quarter consensus... it will likely have to come down significantly. That is what is going to drive the stock down," analyst Dana Guido of Merriman Curhan Ford said.

First-quarter sales volumes at the company's steel manufacturing business are also expected to decline 20 to 30 percent from its fourth quarter levels, with no recovery seen at its Canadian and West Coast markets.

For the fourth quarter ended Aug. 31, Schnitzer posted a net income of $10 million, or 36 cents a share, compared with $126 million, or $4.38 cents a share, a year ago.

Revenues dipped 58 percent to $556 million, primarily due to a 60 percent decline in ferrous net selling prices and a 13 percent drop in processing sales volumes at the company's metals recycling business.

Analysts on average expected the company to earn 31 cents a share, before special items, on revenue of $520.0 million, according to Thomson Reuters I/B/E/S. (Reporting by Krishna N. Das and Thyagaraju Adinarayan in Bangalore; Editing by Hezron Selvi and Pradeep Kurup)