* ABB says base orders deteriorating
* Commodities, forex volatility seen hurting EBIT in Q1
* Environment challenging despite big orders
* Spokesman says mid-term targets not affected
* Company wins $490 million contract, shares underperform
(Adds analyst comment, shares)
By Lisa Jucca
ZURICH, April 2 (Reuters) - Engineering group ABB won a big contract on Thursday but warned smaller orders, representing the bulk of sales, were falling and commodities and currency volatility would hurt core profit this quarter.
Smaller 'base' orders -- defined by analysts as orders smaller than $15 million -- represent around 85 percent of sales at ABB, the world's leading power transmission and distribution group.
The Swedish-Swiss group has won three large contracts over the past few weeks -- including a $490 million Algerian deal, announced on Thursday -- but said the environment for smaller orders remained challenging.
"A continued deterioration of these will inevitably lead to lower profitability in the short-term, and it is the extent of the decline in base orders that will determine the magnitude of future restructuring programmes," Helvea analyst Alessandro Migliorini said in a research note.
ABB, which competes in the power transmission business with peers like Germany's Siemens and Rockwell in America, said that the fall in base orders was especially noticeable compared with the record levels of a year ago.
Total orders in the first quarter of 2008 were $10.9 billion, with EBIT at $1.4 billion. Fourth-quarter orders, however, slipped to $7.2 billion, with EBIT at $459 million. "The company does not want to spread an optimistic view on what it is going on and (instead wants) to underline that the environment is still tough," Richard Frei, an analyst with ZKB.
Shares in ABB were up 1.3 percent at 1104 GMT, underperforming the Dow Jones industrial goods and services index, which was up 3.6 percent.
A spokesman for ABB said the statement was not a profit warning and would not affect the company's mid-term targets.
"It's a heads-up that the base business, which is the bulk of our total business, remains challenging, despite the recent good news on large orders," he said.
"This is a reminder that market conditions are difficult, especially compared to the record quarter last year. This has nothing to do with our mid-term targets."
THIRD BIG ORDER
ABB said on Thursday it had won its third big order in recent weeks, this time from Algeria and worth $490 million.
The oil-and-gas contract is part of a plan to develop hydrocarbon deposits in the El Merk basin in the Algerian Sahara Desert.
ABB is leading a consortium on the $650 million project, which is scheduled to begin in 2012.
The news follows recent big wins including a $550 million order to build a transmission link between Britain and Ireland and a $400 million power transmission order from Kuwait.
These large projects signalled investors had overcome short-term concerns with respect to financing, analysts said.
"We would not minimise the importance of the large orders," Helvea's Migliorini added. "We would not exclude ..., that the projects could serve as a leading indicator, at least in certain segments, for a broader recovery in demand." (Reporting by Lisa Jucca and Oliver Hirt; Editing by Hans Peters and Simon Jessop)