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Strong competition and weak demand causes a disappointing first quarter for scrap metal gaint

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2023-09-11

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Scrap recycler Sims’ disappointing first quarter downgrade knocked the share price lower and helped budge the NSX into negative territory.

The shares fell 15% at one stage and were down around 10.5% just before midday after it surprised with a forecast of breaking even in the three months to September 30, instead of making a profit.

The company blamed weak demand and a weak scrap price on Monday, after last month telling the market that steel demand remained subdued and the scrap price was not sufficient to stimulate robust scrap supply.

It also said that competition for scrap remained strong, but as inflow was subdued, this was squeezing margins.

This is also an issue for Chinese and other steel mills across Asia where low supplies of scrap have forced the mills in China especially to boost production of so-called hot metal - a type of pig iron) by boosting the use of iron ore instead of scrap in the final steelmaking process. Scrap is used to help lower costs and maintain margins but that has become harder to do in mid 2023.

Sims said on Monday that since its August 15 trading update, conditions have not improved.

The company told the ASX that that its trading for August, together with September trends and a deterioration in US domestic market conditions, means that it expects its first-quarter earnings before interest and tax (EBIT) to be approximately breakeven.

It added the forecast "is subject to usual market dynamics, including timing of shipments and the final purchase price for scrap to fulfil those shipments for the quarter."

Sims tried to spin an upbeat line for investors, saying that despite the weakness it remains positive on the company's medium and long term outlook.

"While acknowledging the current challenging market conditions, the Company remains confident in the medium and long-term fundamentals of the business.”

Sims made it clear this view was based on factors that it expects to drive medium to long-term demand for recycled metal:

They were: metal-intensive infrastructure spending, the global decarbonisation of steelmaking, including the growth of electric arc furnaces and the electrification of products that are currently carbon intensive.

This weak first half update means Sims will find it almost impossible to even reach 2022-23’s weak first half result of a net after tax profit of $101 million which was down sharply from the $253 million earned in the first half of 2021-22.

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