The weak US dollar and rising ocean freight costs look like being more than enough to offset continuing strong demand for scrap metal around the world, so Sims Group Ltd has forecast a fall in first half profit and flat second quarter earnings.
Shareholders got the mixed forecast at yesterday's annual meeting that also featured a bitter argument over executive remuneration involving a favourable options package for the CEO.
That tended to overshadow the news from the business frontline.
The company is the world's biggest metal recycler but that isn't enough protection against the pincer movement of the weak greenback and record high ocean freight costs.
Sims says first half profit was likely to be in the range of $105 million to $115 million; compared to the 2007 first half net profit of $120.3 million.
"The volatility in our earnings was demonstrated in our first quarter result which saw net profit of $57.3 million, down 16% on the first quarter last year," chief executive Jeremy Sutcliffe told shareholders.
Mr Sutcliffe said trading conditions were particularly turbulent with the acceleration of container shipments of ferrous scrap metal, record high ocean freight rates and new shredding capacity putting pressure on margins.
These high freights are being driven by the boom in shipping commodities into China, as well as high levels of booking for wheat shipments. The port congestion along the Australian east coast coal ports has also helped push up the cost of general cargo freight costs.
As well the boom in container shipping out of China (and Japan which has boosted exports) South Korea and Taiwan, has meant a shortage of containers, forcing higher costs on Sims.
"This turbulence has spilled over into the second quarter although the measures put in place to counteract these challenges are already having a positive impact," Mr Sutcliffe said.
He said Sims had continued its strategy to securing more scrap material directly at source.
"Taking all this into account, second quarter net profit is expected to be in line with last year and, accordingly, first half net profit is likely to be in the range of $105 million to $115 million," he told the meeting.
Sims said that the global environment and demand for metals remained strong, and that steel inventories in the US were at historic lows.
"We anticipate that the utilisation rates of US steel mills will increase in the first quarter of 2008 and that this will be matched by increases in Turkey and the far east," Mr Sutcliffe said.
He also told shareholders that Sims had sold its first bulk cargoes of ferrous – or iron containing – scrap metal to China in over a year.
The likely increase in the price for iron ore following this year's negotiations between miners and Chinese steel mills is an important indicator for the future trends in scrap prices this year. Australian analysts are forecasting a 30% to 40% rise in iron ore prices, but that was before the BHP move on Rio Tinto. That could complicate pricing talks.
But the big deal this year came in April when Sims announced a $1.85 billion takeover of US-based Metal Management Inc.
That deal will see the company relocate management to the US, so that it sort of follows the path of James Hardie (with the asbestos problems). Hardie derives most of its sales and earnings from the US and Sims will follow, although it will have a higher proportion of earnings and revenue outside the US and Australia, given its position in the global scrap trade.
But this move will have a cost for Australian shareholders.
Chairman Paul Mazoudier told the meeting the deal will mean that:
"Higher earnings base from outside Australia reduces Sims' capacity to frank future dividends
* "At the outset, it is contemplated that the combined group will return in the order of 45-55% of net profit after tax to shareholders
* "The Company will evaluate the most effective means to provide returns to shareholders, including dividends, share buy-backs and other capital management alternatives
* "Post completion buy-back will be contemplated based on market conditions."
