Sims warns of profit drop amid scrap downturn

Sims Metal Management today said precipitous drops in global scrap metal prices are poised to drive volumes lower and materially impact its profits through the first half of its 2020 fiscal year which ends 31 December.

The Australia-based global recycler cited a recent and rapid reduction in steel and aluminum demand since early September that has prompted mills to reduce scrap purchases and led to a subsequent steep fall in prices.

Since the start of September, Turkish deep-sea ferrous scrap import prices for HMS 1/2 80:20 cfr have slid by $30/t to $240/t, marking the lowest level since early February 2017 as assessed by Argus.

Chinese prices for aluminum shredded scrap zorba have witnessed similar deterioration with prices on 13 September at 39.5¢/lb, down by nearly 9pc from August's monthly average price and the lowest level ever recorded in Argus' price history.

A sudden change in steelmakers' ability to manage lower demand for finished products so far this month is the main factor behind the company's revision to its first half 2020 guidance, according to chief executive Alistair Field.

"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," Field said in a letter to investors.

Sims said that scrap prices could fall below the level at which it is economic for scrap suppliers to gather and sell scrap. Suppliers may opt to sit on inventory until the price recovers.

Compounding the impact of falling scrap prices has been the combination of retreating automobile sales, as well as a steady rise in deep-sea freight prices. Sims is a major deep-sea scrap supplier to Turkey from the US east coast and to Asia from the US west coast and Australia.

Freight rates for bulk ferrous scrap from New York to Turkey hit a nine-month high in September at $24/t as assessed by Argus, climbing by $4/t in the last month alone.

Under normal market conditions Sims said that rising freight rates would be manageable, but that declining scrap prices and low liquidity have exacerbated the impact.

Although the company is unsure how long the market downturn will persist, it expects a recovery over the medium term.

"It is too early to say whether this continues to impact our second half," Field said. "When the market recovers, it often does so very quickly."