Russia's United Company Rusal, the world's top aluminium producer, reported sharply lower profits for the second quarter on Monday, battered by high inventories and low prices, and trimmed its outlook for global aluminium consumption.

Despite a 72 percent drop in recurring net profit from a year ago, tight cost controls helped Rusal beat earnings estimates, and analysts said the company's comparatively low production costs should help it outperform competitors.

Even so, Rusal and rivals Alcoa and Aluminum Corp of China (Chalco) are struggling with aluminium prices that are down about 5 percent so far this year to near 2-year lows.

Rusal said it would review 275,000 tonnes of capacity and expected to cut up to 150,000 tonnes by year-end, with subsequent cuts in stages through 2018. That relatively high cost capacity would be replaced by new cost-effective smelters in Siberia that are under construction, it added.

"Second-quarter earnings were better than expected, largely due to better cost controls and higher LME premiums, but otherwise no surprise," said Robin Tsui of BOCI Research.

"Rusal should outperform its rivals and be able to make a profit at the current aluminium price level due to its relatively low production costs."

Concerns about weakening demand for the metal, which is used in drink cans, car parts, planes and iPads, have prompted rivals Alcoa and Norsk Hydro to cut capacity.

Despite Rusal's market-leading position, the weak operating environment has increased pressure on the company, which is embroiled in a shareholder battle over its stake in Norilsk Nickel and is grappling with an ownership dispute over a plant in Guinea.

Hong Kong listed shares of Rusal, which have dropped nearly 12 percent so far this year, were up about 0.70 percent by late morning on Monday, lagging a flat overall market.

At HK$4.38, the stock is trading at less than half of its 2010 Hong Kong IPO value of HK$10.80 a share.

Earnings drop

In the three months ended in June, Rusal posted a recurring net profit of $143 million, compared with an average forecast of $110 million from 11 analysts polled by Reuters.

However, the results were well below the $502 million reported a year earlier.

Recurring net profit is defined as adjusted net profit plus the company's net effective share in the results of Russia's Norilsk Nickel, the world's largest nickel and palladium miner.

Rusal reported a net loss of $37 million in the second quarter, including a $167 million impairment loss related to its Friguia alumina refinery in Guinea, taking net profit in the first half of the year to $37 million, the company said.

The company's earnings are highly sensitive to aluminium prices. A 10 percent price increase could nearly double the company's 2013 earnings, Standard Chartered said in a research note. The inverse relationship also applies, with prices suffering from slack demand.

Rusal said it had net debt of $10.9 billion at the end of June, but no short-term obligations until the end of this year and it repaid $635 million mainly in the first half.

Struggles ahead

Looking ahead, the company said it will have to pay $450 million to lenders in 2013 and has sufficient liquidity to meet these obligations.

Rusal revised down its full-year forecasts for global primary aluminium consumption to 6 percent growth from 7 percent and said it expects 10 percent growth in demand from China, against a previous estimate of 11 percent.

The company estimates growth in consumption demand from China will speed up in the second half, driven by economic stimulus programmes being launched by Beijing.

Controlling shareholder Oleg Deripaska has resisted calls to dispose of Rusal's 25 percent share in Norilsk Nickel, the world's largest nickel and palladium company, to pay down debts at a time when aluminium markets are weak.

The outlook for Rusal is further clouded by Guinean unions' demands that a 2006 contract that sold the country's Friguia alumina refinery to the Russian company be annulled, claiming the ownership rights have no legal merit..

Rusal said on Monday it planned to continue operations in Guinea despite the dispute. – Reuters