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Why the Sims Metal share price crashed 15% lower today

The Sims Metal Management Ltd (ASX: SGM) share price has started the week on a very disappointing note.

In morning trade the scrap metal company’s shares crashed over 15% lower to a 52-week low of $8.59.

Why is the Sims Metal share price crashing lower?

Investors have been hitting the sell button this morning after Sims released a trading update.

Just over a month ago, management warned that its half year profit would be materially lower than the prior corresponding period. This was blamed on the short term market fallout from a scrap price crash.

According to today’s update, trading conditions have deteriorated further since that update. As a result, the company now expects to make a loss in the first half.

Management expects an underlying EBIT loss of approximately $20 million to $30 million during the half. It does, however, expect things to pick up in the second half.

It has forecast a full year underlying EBIT profit of between $20 million and $50 million. Though its guidance is dependent on market conditions not deteriorating even further. Which is far from guaranteed.

Why is Sims Metal making a loss?

There have been three factors weighing on the company’s performance in the first half.

One is the collapse in the sell price for ferrous scrap and the resulting market illiquidity. This has made it impractical for Sims to drop the buy price at the same rate and remain competitive, which has exacerbated its already compressed margins.

A second factor has been unsold inventory which was bought at notably higher prices. This inventory will be sold at a loss and will impact its results through to December.

The third and final factor impacting its business has been the buy price falling to a level which is no longer economic for a number of its suppliers to gather and sell scrap. As a result, Sims has had to either reduce margins to stimulate supply or maintain margins but reduce volumes.

CEO Alistair Field said: “The fundamental and interrelated causes of the crash remain the same as those we discussed in September. Automobile sales are down, global manufacturing is down, China’s growth and world growth are slowing, and unresolved trade wars remain. These factors have combined to cause a significant drop in the demand for steel and zorba-related products.”

Looking ahead, he added: “The first two issues I referred to should wash through Underlying EBIT by the end of December. The ongoing low prices for ferrous and non-ferrous products will continue to impact results for as long as the prices remain at these levels.”

I would forget Sims and buy one of these highly rated shares instead.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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