Sims Metal Management Ltd., with corporate offices in Rye, New York, says it is expecting an underlying earnings before interest and taxes (EBIT) loss for the first half of its 2020 fiscal year, which runs from July 2019 to June 2019, of roughly $13.7 million to $20.6 million (A$20 million to A$30 million). The company says it expects its full-year underlying EBIT profit to be between $13.7 million and $34.3 million (A$20 million and A$50 million).
“The short-term market fallout from the scrap price crash will be worse than originally anticipated when we informed the market that 1H FY20 would be materially lower than the prior corresponding period,” says the company’s CEO and Managing Director Alistair Field. “Three interrelated issues have broadly contributed to the expected first-half underlying EBIT loss.”
Field pointed to “the collapse in the sell price for ferrous scrap, and the resulting market illiquidity,” which he said made it “impractical” to decline the company’s buy price at the same rate while remaining competitive. “This exacerbated the already compressed margins and will continue to negatively impact results through to December, as low margin and no margin cargoes are delivered.”
Sims also had unsold inventory—primarily in the U.K.—as it headed into September that was purchased from June to August. “This inventory will be sold at a loss and will impact our results through to December,” Field says.
“Thirdly, we stated in our September trading update that the buy price had fallen ‘potentially below the level at which it is economic for a number of our suppliers to gather and sell scrap. Alternatively, some suppliers may choose to sit on inventory until the price recovers.’ This is now the case for both ferrous and zorba-related products,” he adds. “As a result, we have had to either reduce margins to stimulate supply and/or maintain margins but reduce volumes. Margins and volumes are meaningfully lower across all metals recycling operating regions and this will continue to impact our results for as long as prices remain at these subdued levels.
Field pointed to decreasing automobile sales and global manufacturing, slowing Chinese and global growth and unresolved trade wars as factors that are contributing to the fall in scrap prices. “These factors have combined to cause a significant drop in the demand for steel and zorba-related products,” he says. “Further compounding the price fall for zorba-related products has been the material lack of Chinese quotas in the December quarter. This is expected to be resolved in the second half of our financial year when the Chinese authorities have indicated that high-quality zorba-related products will be reclassified as ‘new metal’ rather than waste. In the meantime, zorba-related products that were going to China are being sold to other markets at reduced prices.”
Field says the low prices for ferrous and nonferrous products will continue to affect the company’s financial results for as long as they remain at these levels. “Assuming no further market disruption or anomalies, that the freight-inclusive TSI Turkey scrap price remains at or above current levels and trades with significantly less volatility than recently experienced, and that zorba stabilizes at least at current prices, it is expected that the company would return to profit and produce a second-half underlying EBIT of between A$50 million and A$70 million ($34.3 million to $48 million) , resulting in a full year FY20 EBIT of between A$20 million and A$50 million ($13.7 million and $34.3 million).”
He adds, “Our strong balance sheet will allow us to navigate this period of market volatility. This, coupled with our disciplined approach to capital expenditure and cost management, will put us in a strong strategic position when the market normalizes.”