The Trump administration’s tariffs on steel, aluminum, and copper are intended to support US producers, by switching supply away from imports in favor of local production. As the largest metals recycler in the US, Sims (ASX: SGM) supplies scrap metals to the industries requiring these materials.

Why it matters: We expect tariffs on steel, aluminum, and copper imports to the US to be a tailwind for Sims through better pricing. Tariffs are likely to increase domestically produced demand for local metals, thereby increasing a need for locally available scrap metals, as a feedstock in manufacturing.

  • The US generally imports about one-fifth of its annual steel consumption, and half of its copper and aluminum. Scrap is sourced from end-of-life construction, whiteware, vehicles, machinery, and electronics. We expect an undersupply of domestically available metals to push up pricing.
  • However, we expect the margin benefit of tariffs to be short-lived, with normalized prices and volumes from fiscal 2029, as higher prices encourage new entrants and investment, reducing returns for all players. Additionally, competition from imports remains, with scrap tariff exempt.

The bottom line: We raise our fair value estimate for no-moat Sim’s group by 3% to AUD 16.30 per share on the time value of money. Our unchanged forecasts include higher domestic scrap metal prices while tariffs persist. Shares are fairly valued, which we take as the market sharing our view.

Key stats: Higher-priced copper and other nonferrous metals uses include high-growth sectors such as artificial intelligence, renewable energy, and electric vehicles. But these metals are only a small component of scrap and we estimate about 9% of Sim’s US sales volumes are nonferrous.

Sims’ North American segment to benefit from tariffs on imported metals

We expect increased demand for scrap metals over our forecast period, driven by growth in electric arc furnaces, spending on infrastructure, steel and copper as a main material in vehicles and machinery, and in the near term, improved demand for US manufactured steel due to tariffs.

We estimate at least 70% of US manufactured steel is produced in an electric arc furnace, driven by decarbonization of steelmaking and improvements in technology. These mills use up to 100% scrap metal as opposed to basic oxygen furnaces, which generally use about one-fifth scrap.

We also expect an increase in metal intensive infrastructure, underpinned by the US government’s USD 1.2 trillion Bipartisan Infrastructure Deal, representing about double normal policy spending. Steel and other metals, such as copper, are also an essential input in machinery, automobiles, and consumer goods and we do not see growth in these being materially displaced by alternative materials.

The US government’s 25% tariff on all imported steel and aluminum, from March 2025, does not include scrap metal. However, about one-fourth of US steel consumption is imported and we expect this to be curtailed, with more steel domestically manufactured to avoid tariffs. We think this is a tailwind for Sims as the largest supplier of scrap metal. Its plants are currently underutilized, and we think it is well placed to increase its supply of domestic scrap volumes in line with increased demand. We expect tariffs to be in place until the end of the current administration’s term.

After reporting a segment loss in fiscal 2024, the US business removed costs and repositioned as a domestic seller and exporter, from an exporter previously. We support this strategy with domestic prices likely to improve given the tariff backdrop, while maintaining the option of exporting. We estimate segment earnings improving from fiscal 2025 as it reduces overheads costs and gains domestic customers. To this end, we expect a near-term improvement in prices and margins, albeit short-lived, with normalized prices and volumes from fiscal 2029, as higher prices encourage new entrants and investment, reducing returns for all players.

Bulls say

  • Growth in electric arc furnace production is driving demand for scrap steel as the main input of EAF produced steel.
  • Ferrous and nonferrous metals are essential materials in the construction, automobile, technology, consumer, and industrial sectors, with near-term growth expected by increased public and private spending.
  • We anticipate tariffs on US steel to increase demand for US domestically produced steel in the medium term, with Sims, as the largest national player, well-placed to supply scrap metal.

Bears say

  • Scrap processing is a low-margin industry characterized by fragmented supply and low barriers to entry.
  • Ferrous scrap metal can be substituted by direct-reduced-iron and other feedstocks increasing competition if these alternatives become cheaper than scrap.
  • Scrap metal companies are price takers, with prices tied to supply and demand of scrap metal and alternatives.

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