A torrid period for the Sims Metal Management Ltd (ASX: SGM) share price is continuing today after the company released a grim trading update.
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.
What’s The Bad News?
Sims Metals’ management team are now saying that they expect to report an underlying loss before interest and tax of approximately $20 million to $30 million for the first half of the financial year. They also expect full-year underlying profit of between $20 million and $50 million.
The bad news comes just one month after the company already revised their guidance downwards on the back of significant falls in ferrous (iron-containing) and non-ferrous metal pricing.
Commenting on the expected loss in the first half of FY20, Sims Metal CEO Alistair Field said, “The short term market fallout from the scrap price crash will be worse than originally anticipated when we informed the market that 1H FY20 would be materially lower than the prior corresponding period.”
Mr Field went on to explain that there were three key interrelated issues that had contributed to the expected loss for the first half.
First, the collapse in the selling price of ferrous scrap metal and the resulting market liquidity had served to compress tight margins even further.
Second, unsold inventory that had been bought previously at much higher prices is now being sold at a loss which will have a material impact on profitability right until December.
Finally, the collapse in product prices has meant Sims has had to choose between reducing margins in order to stimulate supply or trying to maintain margins but at much lower volumes. In the end, both margins and volumes have fallen materially lower and this is not expected to improve until market prices start to improve.
Slowing Auto Sales?
Mr Field speculated that the causes of the crash in prices were due to weak automobile sales and global manufacturing, a slowing world economy and ongoing trade tensions. According to Mr Field, these factors have combined to cause a significant drop in the demand for steel and zorba-related products.
One saving grace for shareholders is that Sims remains conservatively financed with net cash on the balance sheet. If you ask me, this strong financial position gives the company a good opportunity to not only survive lower prices for longer but may become a huge benefit if it is able to buy up smaller competitors that go bust as a result of the downturn.
At the time of publishing, Luke has no financial interest in any companies mentioned.