Sims Metal swings to a loss amid global steel glut

19 February 2016

Sims Metal chief executive Galdino Claro said that a flood of Chinese steel exports is hammering prices for the scrap metal it sells as the company swung to an underlying loss of $17.8 million.

The world's biggest scrap metal recycler said that sales revenue for the six months ended December 31 slumped 28 per cent to $2.4 billion, while sales volumes dived 22 per cent to 4.3 million tonnes.

"Overcapacity of steel production in China, coupled with declining Chinese domestic demand has pushed exported steel into the markets of many of the group's traditional customers. This has significantly depressed demand for ferrous scrap metal globally," Mr Claro said.

Ferrous scrap is used by electric arc furnaces to make steel, and the pressure on the steel industry inevitably impacts raw material prices.

Embattled local steel and iron ore group Arrium, which operates the Whyalla blast furnace in South Australia, has warned it may have to shut the plant as market pressures compound its debt woes.

Both Arrium and BlueScope Steel have hit out at the torrent of Chinese steel sloshing around global markets.

On a statutory basis, Sims Metal reported a $250 million loss for the half, down from a $74.5 million profit.

The statutory result includes a $53 million impairment to goodwill and other write-downs worth $119.1 million.

"The company faced substantial market headwinds during first half FY16. These near-term challenges translates into weaker earnings across all our businesses," Mr Claro said.

"The persistent challenges of lower commodity prices and volumes prompted the urgent need to make significant adjustments to the company's operational model."

In November, the company shocked investors with a massive profit downgrade due to the dive in ferrous scrap prices, undermining confidence in Mr Claro's turnaround plan, which had been pitched as a turnaround irrespective of market conditions.

In a results preview piece, Credit Suisse analyst Michael Slifirski said the downgrade raised serious questions about the company's forecasting ability.

At the time, Sims announced new initiatives to mitigate the market headwinds, including sacking 500 workers and closing underperforming sites.

In the second half of this year, an additional 25 sites will be sold or closed in the struggling central region in the United States. These measures, plus others, are expected to contribute $130 million to group earnings by the end of 2015-16.

Sims Metal declared an interim dividend of 10¢.



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