Global recycling group Sims Metal Management said today that it will report a loss for the first half of its current fiscal year because of the sharp fall in global ferrous scrap prices in September.
Australia-headquartered Sims — which has extensive metals recycling operations in the UK, US and Australia — expects to record an underlying earnings before interest and tax (EBIT) loss of A$20mn-30mn ($13.6mn-20.5mn) for the first half of its 2020 fiscal year, which runs from July 2019 to June 2020.
The firm cited the rapid decline in ferrous scrap prices, an inability to lower its own purchase prices accordingly and the build-up of higher-priced inventory before the export price fall as the main drivers for the loss.
The Argus daily HMS 1/2 cfr Turkey assessment dropped by $48.80/t, or 18pc, to $221.20/t on 30 September, from $270/t on 2 September. The price has since recovered partially, rising to $252/t on 25 October, but is still well down from the first eight months of this year.
Sims said this collapse has made it difficult to drop its purchase prices at the same rate and remain competitive, further squeezing its already tight margins on export sales. Cargoes that the firm delivers through to December will have low or zero margin.
One of the reasons it has not been able to drop purchase prices more sharply is that these prices have fallen "potentially below the level at which it is economic for a number of our suppliers to gather and sell scrap", the firm said.
Sims has consequently had to either reduce margins to stimulate supply or maintain margins but reduce volumes.
The Argus weekly assessment for HMS 1/2 delivered to southern UK ports fell by £40/t — equivalent to $47.47/t — to £130-135/t on 1 October from £170-175/t on 3 September. The weekly assessment for #1 HMS delivered to New York fell by $45/t over the same period, to $165/t from $210/t.
Aside from the wider price fall, another contributing factor to Sims' projected first half loss is that the company has unsold inventory leading into September, particularly in the UK, purchased at prices reflective of the June-August seaborne market.
The Argus weekly assessment for HMS 1/2 delivered to southern docks averaged £180/t in June-August, and Sims confirmed that any inventory purchased at this time and not sold before September will have been sold at a loss.
Demand drop
Sims has also been pressured by weaker demand for aluminium scrap product zorba. Chinese aluminium scrap volumes approved for import in the fourth quarter are extremely low, which is depressing zorba prices globally.
Sims chief executive and managing director Alistair Field said the company expects this issue to ease in the second half of the company's fiscal year, based on indications by Chinese authorities that they will reclassify high-quality zorba-related products as "new metal" instead of waste, which would allow the country to resume zorba imports.
The firm said that if zorba and Turkish scrap prices stabilise at or above current levels, it expects to return to profit in the second half of its 2020 fiscal year, and forecasts post full-year 2020 EBIT of A$20mn-50mn.
