Why The Sims Metal (ASX:SGM) Share Price May Be Sent To Scrapheap

The Sims Metal Management Ltd (ASX: SGM) share price may be sent to the scrapheap today after a disappointing trading update was released.

Sims Metal is a global leader in metals and electronics recycling. The company specialises in ferrous and non-ferrous metals recycling, post-consumer electronics goods recycling and municipal waste recycling.

Sims Metal’s Negative Trading Update

The metal recycling business said that there has been significant falls in ferrous (iron-containing) and non-ferrous prices, which will negatively impact the first half result of FY20 and the result will be lower than the first half of FY19.

Sims Metal CEO and Managing Director Alistair Field explained the situation:

The escalating trade wars that I discussed at our year-end results continue to reduce the demand for steel and aluminium.

At that time, steel mills appeared to be managing the lower demand, but in early September they materially reduced their scrap purchases, and also their outlook for scrap purchases. This reduction in demand for scrap has driven a steep fall in prices.”

The situation has gotten so rough that the current prices are below where it’s economic for a number of suppliers to gather and sell scrap. Some suppliers may decide to sit on inventory until the price recovers.

Another troubling factor for Sims is that car sales continue to fall.

As if that wasn’t enough, there has been a steady rise in deep sea freight prices have increased over the past month. Normally freight costs can be recovered, but at the moment it’s not possible because of the low price and low demand.

What Now?

Sims Metal doesn’t know how long this will last, but of course it expects prices to recover over the medium term. The company will need to manage its volume against margin balance during this period.

It’s these types of events that make me glad that I don’t own cyclical businesses in my portfolio, although this period may actually turn out to be a good time to buy. Who knows?

Either way, Sims isn’t generating growth at the moment. But the shares in the free report below are certainly growing and could be good value.

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.

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