Sims warns of effect of falling metals prices

Sims warns of effect of falling metals prices

The company says declining ferrous and nonferrous scrap prices will affect its fiscal 2020 first-half earnings.

September 23, 2019

Sims Metal Management Ltd., with its corporate office in Rye, New York, says recent and significant declines in pricing for ferrous and nonferrous will have a negative impact on the first half of the company’s 2020 fiscal year so that its financial results will be “materially lower” than in the first half of its 2019 fiscal year.

“The escalating trade wars that I discussed at our year-end results continue to reduce the demand for steel and aluminum,” says Sims CEO and Managing Director Alistair Field. “At that time, steel mills appeared to be managing the lower demand, but in early September they materially reduced their scrap purchases and also their outlook for scrap purchases. This reduction in demand for scrap has driven a steep fall in prices.”

Field says the current environment leads to a buying price that could be “below the level at which it is economic for a number of our suppliers to gather and sell scrap.”

He continues, “Alternatively, some suppliers may choose to sit on inventory until the price recovers.”

Field says automobile sales also continue to fall, affecting demand for twitch, the price of which also is falling.

“Compounding the impact of falling scrap prices has been a consistent rise in deep-sea freight prices over the last month,” he says. “Under normal market conditions this would be manageable, but in this very low price environment, with poor liquidity, it is not possible to recover increased freight costs through the buy price.”

While he says he expects a recovery in the medium term, “there will definitely be an impact on our first half result, and I am expecting the outcome to be materially lower than the prior corresponding half year.”

Sims also is seeing signs of falling volumes, which necessitates careful management of its volume versus margin trade-off, Field says. “It is too early to say whether this continues to impact our second half. When the market recovers, it often does so very quickly.”

He concludes by saying the business is “well-positioned to deliver good returns through the commodity cycle.”

Sims closed its 2019 fiscal year June 30. For the year, it reported net profit after tax of $161.9 million, representing an underlying diluted earnings per share of 78.8 cents.

The company’s sales revenue for the year was $6,640 million, which was 3 percent more than Sims’ sales revenue in the previous fiscal year. Sims attributes the increase to sustained sales volumes despite a declining price environment. Sales volumes were relatively flat at 9.8 million metric tons.