SKF sees Q4 demand rise, cautious of auto recovery

* Sees slightly higher demand in Q4 vs Q3

* Says end of autos incentives could dent demand in Q4

(Adds CEO comment, analyst comment; updates shares)

By Johannes Hellstrom and Niklas Pollard

STOCKHOLM, Oct 20 (Reuters) - Sweden's SKF (SKFb.ST), the world's biggest bearings maker, posted a smaller-than-expected fall in quarterly earnings on Tuesday due to cost cuts and offered the first signs it would see a pickup in demand.

However, the stock gave up its early gains as the market fretted over the prospect that the auto industry could take a fresh hit whenever governments start rolling back their stimulus packages. Auto-related sales make up roughly a third of SKF's business.

SKF shares, which have risen 57 percent this year, were down 3.2 percent to 117 crowns by 0949 GMT. The slide ended several weeks of gains. "I think you can really relate it to the fact that the share price has come up from 105 to 120 more or less in a straight line since the beginning of October," Societe Generale analyst Roddy Bridge said. "The market was hoping for them to say better things about Q4 and onwards."

The bellwether for the manufacturing sector, whose bearings are used in products ranging from dishwashers to passenger jets, said it expected better demand in the fourth quarter, though it would still be significantly lower than a year ago.

"The demand is expected to be slightly higher for the SKF Group in total. It is expected to be relatively unchanged in Europe and North America and slightly higher in Asia and Latin America," the company said in a statement.

SKF Chief Executive Tom Johnstone said the year-on-year fall in sales volumes in the fourth quarter would be considerably smaller than in the first nine months of the year, but still well into the double digits.

"I think the volume will be down by (a figure in the) upper teens," Johnstone told Reuters.

"What we're moving toward is the destocking impact on our sales decreasing in most areas of our business. Therefore I believe we're now starting to move towards a better reflection of the demand situation. But we are not there fully yet."

INCENTIVES FADING

SKF said its manufacturing level would be "slightly higher" in the final three months of the year versus the third quarter. Incentive schemes for the car industry on both sides of the Atlantic, introduced to break the free-fall in auto markets in the wake of financial crisis, have helped support sales in the sector in recent months.  Continued...