2nd UPDATE:Norsk Hydro 2Q Net Profit Falls 73%; Beats Forecasts

Norwegian aluminum and power supplier Norsk Hydro ASA (NHY.OS) Wednesday said it saw further cutbacks in the second half, even though it reported an unexpected second-quarter net profit following a pick up in demand for aluminum in China despite low prices. The company faces mounting pressure from weak aluminum prices and poor demand, and has already shut down capacity to address oversupply in the industry. Excluding China, Chief Executive Svein Richard Brandtzaeg said he expects full- year primary aluminum consumption to decline up to 15%-20% from 2008 levels. Norsk Hydro said second-quarter net profit fell 73% to 211 million Norwegian kroner ($33.3 million), down from a net profit of NOK786 million in the same period a year ago but above an average of five analysts' forecasts in a Dow Jones Newswires poll for a NOK298.25 million net loss. "The results reflect the weak global economic environment and historically low aluminum prices," Norsk Hydro said. "Underlying results from Hydro's downstream operations improved, supported by a seasonal increase in demand and costs cutting measures that were implemented at an early stage in the market downturn." Its closely watched loss before interest and tax for the period was at NOK618 million, down from a profit of NOK1.62 billion a year ago. Revenue fell 29% to NOK17.12 billion from NOK23.98 billion. Analysts on average had forecast an underlying Ebit loss of NOK875.5 million and revenue of NOK14.50 billion. Norsk Hydro said it had seen some positive effects from cost and capacity cuts and expected fixed costs to fall further. It remains cautious on the aluminum market outlook and expects prices - down some 50% since their year-ago peak - and third-quarter results to stay weak. Brandtzaeg said global aluminum stocks have continued to increase from already lofty levels, showing "there's too much aluminum production in the world today." Hydro has itself completed cuts of 460,000 tons of annual capacity. The group has set aside about NOK450 billion for future rationalizations and closure costs since the fourth-quarter of 2008, with expected curtailments of 26% in primary aluminum production and 22% in alumina production from 2008 levels, it said. At the end of June, the company had sold more than 90% of its third quarter primary aluminum production at around $1,475/ton. The company said it hasn't experienced any significant defaults from counterparties so far. On a more upbeat note, Hydro said its $5.6 billion Qatalum smelter in Qatar was 84% completed, up from 73% at end-March, and is on schedule for year-end start. Analysts' reactions were mixed. DnB NOR analyst Gudmund Halle Isfeldt, who has a buy rating and NOK46 target price, said Norsk Hydro surprised on the upside both in terms of operating cash flow at NOK2 billion and underlying Ebit. " It's focusing on restructuring and is succeeding in pulling costs down. (Norsk Hydro's) doing the right thing in a very difficult environment," he said. Liberum Capital, however, said the underlying Ebit loss goes against improving trends of peers like Alcoa Inc. (AA), and that it sees no need to buy Hydro as long as aluminum inventories are still edging up. At 0712 GMT, shares were up 5.6%, or NOK1.9, to NOK34.68, outperforming a broadly higher Oslo market. Shares in Norsk Hydro have lost 48% of their value in the past 12 months and underperformed a 27% drop in the OBX index. Company Web site: www.hydro.com