Escalating trade wars crimp Sims Metal's profit outlook

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Escalating trade wars crimp Sims Metal's profit outlook

By Dominic Powell

Metal and electronics recycler Sims Metal has warned a rapid drop in demand for scrap metal will significantly affect the company's results for the first half of the financial year.

Chief executive Alistair Field said in a trading update on Monday that conditions had worsened since its full-year results late last month, where the company flagged escalating trade wars, coupled with weak car sales, would reduce the demand for steel and aluminium over the medium term

ASX-listed Sims Metal has warned escalating trade wars have hit the global demand for scrap metal.

ASX-listed Sims Metal has warned escalating trade wars have hit the global demand for scrap metal.Credit: Ryan Stuart

Mr Field said while it initially appeared steel mills were managing the lower demand, early this month mills had materially reduced their purchases and purchase outlook, causing a "steep fall" in prices.

At the end of August, the scrap metal price including freight from Turkey, the world's largest scrap metal importer, sat at around $US268 per tonne. Midway through last week, it had fallen below $US240.

"The current sales price results in a buy price that is potentially below the level at which it is economic for a number of our suppliers to gather and sell scrap."

Shares dropped sharply following the announcement, closing down 13.3 per cent to $10.90.

Regardless, our strategy remains sound, and the business is well-positioned to deliver good returns through the commodity cycle.

Sims Metal chief executive Alistair Field

Mr Field said while the $2.5 billion listed company would be able to manage the steep decline in demand under normal market conditions, the fall has coincided with a consistent rise in deep-sea freight prices, leaving the company unable to recoup its costs in the "very low price" environment.

The Baltic Dry Index, which tracks changes in the cost of transporting various raw materials including steel, reached a nine-year high of 2518 earlier this month.

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While the company did not attach figures to its trading update, Mr Field said the company was expecting a "materially lower" result for the 2020 half-year when compared to the same period last year.

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In the first half of 2019, Sims Metal posted $3.3 billion in sales and an underlying net profit after tax (NPAT) of $76.7 million.

Full-year sales for the US-based company were $6.64 billion, up 3 per cent on the year prior, though full-year underlying NPAT was down 14.2 per cent to $162 million.

Simon Mawhinney, managing director of Sims' largest shareholder Allan Gray, said while the trading update was "disappointing", it didn't affect his long-term outlook for the company.

"It's somewhat emblematic of some of the cyclical headwinds that face a lot of companies," he said, adding that he believed conditions for the company would "normalise" over the next five years.

Mr Field said it was too early to say if the decline in demand would affect the company's second-half results, but also noted he expected the market to recover in the medium term.

"Regardless, our strategy remains sound, and the business is well-positioned to deliver good returns through the commodity cycle," he said.

"While our focus has always been on disciplined capital expenditure and required returns, we will be particularly cautious during this market downturn."

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