Zorba, slower flows pinch Sims JV SA Recycling

Sims Metal Management expects lower profit from its US joint venture SA Recycling to drive its first quarter earnings down from the prior quarter, offsetting broadly flat results from its wholly-owned operations.

The global recycler expects earnings before interest and taxes (Ebit) for its first quarter ended 30 September to be A$58mn-63mn ($42mn-46mn). This up from Ebit of A$45mn in the same period a year earlier, but down from fourth quarter earnings of A$70mn-80mn.

Broadly consistent earnings from Sims' wholly-owned operations are expected to be offset by a A$10mn-15mn drop in profit from California-based SA Recycling (SAR), the 50/50 joint venture between Sims and Adams Steel. The expected drop represents 15-20pc of Sims' A$69mn share of SAR's fiscal 2018 earnings.

Reduced performance from SAR is expected to be driven by slower inbound scrap flows and lower selling prices for zorba.

Sims said that "a number of initiatives" are being pursued to boost collection volumes at SAR through the rest of the year, but no specific details were provided.

US obsolete ferrous scrap flows slowed through the summer as dealers dropped scale prices in response to lower consumer-buying prices, which reached four-year highs in April.

Reduced demand from China pushed zorba prices down by more than 20¢/lb in recent months.

Shipments to the country, by far the largest consumer of US zorba, have plummeted in response to a higher impurity threshold for scrap imports imposed earlier this year and escalating US-China trade tensions that resulted in a 50pc tariff on US zorba imports and higher scrutiny of US shipments.

SAR is upgrading its downstream non-ferrous recovery equipment to produce higher-quality zorba that will meet China's 1pc non-metallic impurity threshold, which Sims said will assist in facilitating sales in the current market. The equipment is expected to be operational before 31 December.

Earlier plant investments by Sims' wholly-owned operations in North America helped insulate the rest of the company's US business from the impact of China's higher quality standards, though a healthy US zorba supply has also weighed on aluminum scrap prices more broadly.

SAR operates more than 70 locations, primarily on the west coast and in the southeastern US, including 13 shredders and deepwater port operations in Long Beach and Los Angeles, California, as well as Savannah, Georgia.