Motley Fool Australia

Sims Metal Management share price crushed after disappointing trading update

US China Trade War

In morning trade the Sims Metal Management Ltd (ASX: SGM) share price has crashed lower after providing a disappointing trading update.

At the time of writing the scrap metal company’s shares are down 12.5% to $11.00, but were down as much as 17% to $10.41 at one stage.

What did Sims Metal Management announce?

This morning Sims Metal Management announced that recent and significant falls in ferrous and non-ferrous prices will negatively impact its performance in the first half. As a result, its result is expected to be materially lower than the prior corresponding period.

The company’s chief executive officer and managing director, Alistair Field, blamed the trade war on the rapid deterioration in the market.

He said “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 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. Alternatively, some suppliers may choose to sit on inventory until the price recovers,” he added.

In addition to this, the company notes that vehicle sales have continued to fall, which has led to weakening demand and prices for twitch.

And adding insult to injury, a consistent rise in deep sea freight prices over the last month are weighing heavily on its profits.

Mr Field explained: “Under normal market conditions this would be manageable, but in this very low price environment, with poor liquidity, it is not possible to recover increased freight costs through the buy price.”

And while the chief executive remains positive on the medium term, he warned that “there will definitely be an impact on our first half result and I am expecting the outcome to be materially lower than the prior corresponding half year.”

“We are seeing signs of falling volumes at these prices so we will need to carefully manage the volume versus margin trade-off. It is too early to say whether this continues to impact our second half. When the market recovers, it often does so very quickly. Regardless, our strategy remains sound, and the business is well positioned to deliver good returns through the commodity cycle,” he concluded.

Also on the move this morning have been the shares of Bellamy’s Australia Ltd (ASX: BAL) after it received a takeover approach and Beach Energy Ltd (ASX: BPT) due to a sharp rise in oil futures following drone attacks on two key oil refineries in Saudi Arabia.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…