Global metal recycler Sims’ earnings set to fall

Australia-based global recycling group Sims Metal Management said today that it expects a 12pc drop in earnings for the first half of its 2018-19 fiscal year, citing lower margins caused by volatile trading conditions across ferrous and non-ferrous operations in its key markets.

Sims expects underlying earnings before interest and tax (EBIT) for the 1 July-31 December period to fall by 12.2pc on the year to A$109.8mn (US$78.5mn). Earnings are set to fall across almost all of its international division, despite overall sales volumes rising by 3.3pc on the year to 4.92mn t.

Europe earnings virtually wiped out

The most significant first half decrease occurred in the group's Europe Metals division, which predominantly comprises its UK-based operations. Sims expects Europe Metals underlying EBIT to have fallen 87.9pc on the year to A$1.4mn ($1mn) in the July-December period.

The company said its European ferrous scrap earnings were caused by a weakening of the Turkish economy in 2018 that it claims eradicated the premium for deep-sea ferrous scrap sales to Turkey over short sea, container or domestic sales.

The issue was exacerbated by strong competition among UK exporters for scrap throughout July-December that ensured purchase prices did not fall sufficiently to compensate for the erosion in the Turkish deep-sea premium, which squeezed Europe Metals' margins.

This strength in UK pricing is reflected in Argus data for the July-December period. The Argus daily HMS 1/2 80:20 cfr Turkey ferrous scrap price dropped by 19.5pc from $351.50/t on July 1 to $283/t on December 31.

Over the same time, the Argus weekly assessment HMS 1/2 delivered to southern UK docks fell by a smaller degree of 12pc from £202.50/t on 1 July to £177.50/t on 31 December. Despite volatile Turkish pricing throughout the second half of 2018, UK dockside prices never moved below the £175-180/t mark amid strong competition among exporters responding to a surge in demand from Asian containerised markets.

Sims also stated that Europe Metals' Turkish customers have increased their requirements for higher quality ferrous scrap, causing the division to implement stricter quality controls on purchases and consequently impacting its intake volumes.

Europe Metals' non-ferrous margins also fell in reaction to the shift in trade flows caused by China's implementation in 2018 of heavy restrictions on non-ferrous scrap products. Reduced Chinese imports of zorba scrap have caused an increase of availability of the mainly aluminium product in Europe, pressuring prices downward throughout July-December. But Sims said UK purchasing prices for shredder feed, which is a feedstock for zorba and steel shred, have not fallen as sharply as zorba prices, creating another squeeze point for Europe Metals' margins.

Additionally, Europe Metals' sales of insulated copper wire and electric motors were hit in July-December by Chinese restrictions on imports of these products. Europe Metals has installed copper granulation plants to increase the quality of its copper scrap exports to meet China's required purity levels, but it does not expect to see EBIT contribution from these assets until the second half of fiscal 2018-19.

North American margins also pressured

Sims' North America Metals division was comparatively much more stable in July-December but also came under pressure from the prevailing volatility in the global scrap trading environment caused by growing protectionism and the weakness of the Turkish economy. The North America Metals division's earnings for the period fell by 4.6pc on the year to A$33.1mn.

As in Europe, high purchasing prices of scrap for export sales cut into margins. Sims specifically cited issues in October and November, when US purchase prices increased swiftly after the export market spiked higher. Strong competition for scrap at certain locations compounded this issue.

Underlying EBIT at Sims' US joint venture SA Recycling were also down in the first half of fiscal 2018-19, falling by 33pc on the year to A$16.8mn. SA Recycling was impacted by the fall in global zorba prices and lack of equivalent accompanying decrease in shredder feed prices.

Sims' Australia and New Zealand metals division was the most stable of the group's units, with underlying EBIT falling by just 1.4pc on the year to A$43.6mn.