* Sees flat ammonium nitrate volumes in 2017
* Warns of price cuts and rising input costs in 2017
* Expects coal prices to fall from recent highs (Adds CEO, analyst comments)
By Sonali Paul
MELBOURNE, Nov 4 (Reuters) - Orica Ltd ORI.AX , the world's top supplier of commercial explosives, warned on Friday that a sharp rebound in coal prices which has helped its customers over the past few months was unlikely to last long and said the world remained "difficult".
Orica reported a 7 percent drop in annual underlying profit, hit by weaker ammonium nitrate sales volumes and prices amid a glut of supply in Australia, partially offset by cost cuts. The second half was stronger than the first half.
Chief Executive Alberto Calderon said the company was taking a conservative view on the year ahead despite the recovery, due to uncertainty over China's policies and the U.S. election, and after being burned in early 2016 by a prediction that the worst was over for miners.
"We can see this rally in prices has given them quite a lot of breathing space in their cashflows and their balance sheets. So we are seeing activity. But it's a very difficult world," Calderon told reporters on a conference call.
"I would agree with most of the analysts that probably there's a bit of exuberance in prices in coal, for example, and it will return back to some level of more normal prices."
Orica forecast its sales volumes would be flat for the year to September 2017, and flagged that it faces some price cuts on its sales contracts and higher input costs.
"Clearly there's still a challenging environment in 2017," said Macquarie analyst John Purtell. "The outlook is somewhat of a reality check."
Net profit before one-offs fell to A$389 million ($299 million) for the year to September from A$417 million a year ago. Analysts had expected a net profit of A$385 million, according to Thomson Reuters I/B/E/S.
Orica's final dividend of 29 cents was 4.5 cents below analysts' forecasts.
The company in May ditched its policy of never cutting dividends and switched to a payout ratio of 40 to 70 percent of underlying earnings to shore up its balance sheet and stave off a credit downgrade.
Purtell said the company's 24 percent cut in net debt to A$1.55 billion and a strong increase in cash flows were positive, aided by a drop in capital spending to A$263 million, well below the company's forecast in May.
However the lower capital spend was partly due to hiccups in the opening of its 330,000 tonnes a year Burrup ammonium nitrate plant in Western Australia, a joint venture with Norway's Yara YAR.OL , designed to supply iron ore mines in the Pilbara.
($1 = 1.3019 Australian dollars)