* Sees steady operating profit amid tough market conditions
* Q4 EBIT 27.8 mln eur vs Reuters poll avg zero
* Proposes unchanged dividend of 0.80 euros per share
* Shares slip but outperform steel sector (Recasts with comments from news conference, market reaction)
By Michael Shields
VIENNA, May 30 (Reuters) - Austrian steelmaker Voestalpine said prospects for a European sector upturn were fading as demand wanes in the car and energy sectors and excess capacity triggers “destructive price wars”.
The group nonetheless forecast it could keep underlying operating profit steady this fiscal year as downstream divisions take up the slack from its steel business.
It was a bleaker picture than the one painted by Chief Executive Wolfgang Eder only last month, when he said he expected its steel business to pick up in the first half of the business year that runs from April to March.
Signs of recovery had prompted many rivals to ramp up output, which led to a glut, Eder told reporters on Wednesday.
“Customers immediately step on the brakes. Inventories are piling up and suddenly you say you have to use capacity, and then prices fall,” he said.
He said Voestalpine had no plans to cut capacity but steel price hikes it had foreseen for July were off the table, made unnecessary by falling input prices that help protect margins.
The maker of special steels used in tools, turbines and cars said the “challenging macroeconomic climate is increasingly leaving its mark on the real economy, especially in Europe”.
The downbeat view came after Germany’s two biggest steelmakers, ThyssenKrupp and Salzgitter, gave a grim outlook as the euro zone crisis crimps spending on factories and equipment.
The construction sector had not returned to pre-crisis levels and “significant parts of the automobile industry and of the energy sector have now begun to suffer from a growing weakness in demand”, Voestalpine said in its results statement.
The mechanical engineering, aviation and railway sectors remained satisfactory but were unable to offset negative developments in other industries, the company said.
“In this environment, very specific challenges are looming for the European steel industry, particularly in the flat steel segment. This industry that is beset by structural overcapacity is still a long way from the summer recovery that had been anticipated in early 2012, and even the probability of a sustainable upswing in the latter part of the year is receding.”
Excess capacity in Europe, especially in ordinary steel, combined with extremely volatile but falling raw materials prices was “resulting in destructive price wars”.
Voestalpine’s steel business represents a third of group sales, which rose 10 percent to a record 12.1 billion euros ($15.2 billion) in 2011/12.
But earnings before interest and tax (EBIT) plunged nearly 29 percent to 704 million euros. Excluding one-offs, full-year EBIT fell to 909 million.
The group posted fourth-quarter EBIT of 27.8 million euros, beating the average estimate of zero in a Reuters poll of analysts, and proposed an unchanged dividend of 0.80 euros.
“From today’s point of view ... operating results for FY 2012/13 should be achievable on similar levels like in FY 2011/12, despite the challenging environment in the steel segment,” the company said.
Eder said the guidance referred to 2011/12 EBIT excluding a 205 million euro provision at its rail business to cover risks from a German anti-trust probe and closure of a German unit.
Analysts polled by Reuters expect underlying 2012/13 EBIT of around 1.07 billion.
Voestalpine shares slipped 1.2 percent to 21 euros by 1053 GMT, outperforming a 2.9 percent fall in the Stoxx Europe basic resources index.
Voestalpine trades at 6.6 times 12-month forward earnings, a discount to steel majors Salzgitter, ArcelorMittal and ThyssenKrupp, according to Thomson Reuters StarMine, which weights analyst estimates by forecasting accuracy.
BHF Bank analyst Hermann Reith reduced his target price for Voestalpine stock and cut his earnings estimates, citing steel price declines and structural problems on the supply side in Europe, but he stuck to his “overweight” recommendation.
“Voestalpine provides a defensive business model in the steel sector at a discount price compared to the steel companies in our coverage. The outlook contrasts positively to Voestalpine’s peers,” he said in a research note.
$1 = 0.7977 euros Additional reporting by Angelika Gruber; Editing Hans-Juergen Peters and Mark Potter