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Thank you for standing by. And welcome to the Sims Metal Management Limited 2020 Half Year Results Conference Call. [Operator Instructions] Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earning outlook and prospects for Sims Limited. These forward-looking statements are subject to assumptions and uncertainties. Actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company's website, www.simsmm.com. As a reminder, Sims Limited is domiciled in Australia and all references to currency are in Australian dollars unless otherwise noted. I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited. Please go ahead.
Thank you, and good morning. It's a pleasure to be here in Australia, delivering the half year results for Sims. Joining me on today's call is the group Chief Financial Officer, Stephen Mikkelsen; and Bill Schmiedel, the President of Global Trade. The slide presentation that we will run through has been logged with the ASX, along with the results release. As you can see on Slide 3, the format for today is that I will run through a general overview of performance and the highlights for the first half fiscal 2020. I'll then hand over to Stephen, who will take us through our financial results before I discuss some of the company's strategic priorities and near-term market outlook and the challenges. Following that, there will be time for Q&A. Now turning to Slide 4. The rapid collapse in ferrous scrap prices in September 2019, combined with historically low zorba prices, severely compressed margins and resulted in a first half loss. This period has been challenging for all metal recycling companies globally. However, prices subsequently improved and some recovery is evident in the market. While it is disappointing to present a first half loss, I believe an attractive long-term outlook remains. We are progressing the rollout of our strategic growth plan, and I'm pleased with the progress to date, including the testing of Sims Auto Shred Residue with 2 technologies. The results supported previous returns and demonstrated good environmental outcomes. Secondly, recycling the cloud volumes reached 9,000 tonnes this half and are on track to reach our FY '20 target of 20,000 tonnes. Thirdly, we won an additional municipal recycling contract in Florida and the terms of this contract mitigate commodity risk. Lastly, the new regulation in China allows the import of our high-quality nonferrous material and validates our strategic push to increase retail nonferrous volumes in North America and other regions. Turning to Slide 5, which highlights some key figures. The challenging business conditions that confronted us in the first half are self-evident across all our metrics. Despite the loss making position, we are paying a fully franked interim dividend of $0.06 per share, and this demonstrates our confidence in the business and its performance over the medium term. The dividend was ultimately constrained by available franking credits, and we returned a further $22 million in share buybacks. Now on to Slide 6, our safety slide. Excellent safety outcomes require continued focus in identifying and managing risk. We have maintained focus and made progress on critical risk awareness and management as well as increased safety-related communications. I'm pleased that this has flowed through to our safety measures, which has seen a reduction to 1.2 for this half year. Turning now to sustainability on Slide 7. I have said many times before that the core of Sims business model is sustainability. Our business makes a positive contribution to society by not only reducing waste that would have otherwise gone to landfill, but also lowering CO2 emissions. In 2019, we announced our purpose to create a world without waste to preserve our planet and the growth strategy. Our sustainability strategy aligns with these, and we are now developing our long-term sustainability goals. We will host an environment, social and governance briefing on the 19th of March this year, and I look forward to further discussing sustainability with you then. Slide 8 provides the high level consolidated financial results for first half fiscal 2020. Stephen will be covering the financials in considerable detail. But I do want to highlight that despite the setback of this first half year, I'm adamant that we must return the business to achieving above a 10% return on capital. Turning now to Slide 9, which provides the charts on market conditions. The 2 charts on the left depict prices in our key commodities over the last 2 years. As you can see, ferrous reached its low point in September and is currently $50 per tonne higher despite volatility in recent weeks. There is good news in the zorba price as you can see from the bottom chart. We have seen a recovery in zorba pricing since January. And so far zorba has shown resilience following the coronavirus, holding close to USD 1,000 per tonne. This in part is due to China reclassifying high-grade nonferrous metals as renewable metal rather than waste, enabling imports of these materials from July 1, 2020 without quotas. This means about 90% of Sims nonferrous grades of scrap can be imported into China, validating our investment in quality initiatives and our strategic growth of nonferrous retail volumes in North America. I'll hand over to Stephen now for further detail on the financial results.
Thanks, Alistair. I'm on Slide 11. I appreciate that the half year is a little complicated, but the adjustments between statutory EBIT and underlying EBIT fall into 3 main areas: Firstly, we've written off the legacy brand that is no longer used in the U.S., rather than continue to amortize it over the next 8 years, we've expensed it in its entirety. We have also written off goodwill in those European businesses that remain with us following the sale of the compliance scheme operations. Secondly, we have increased the estimate relating to an environmental liability we have in the U.S. I am confident that this now fully covers that commitment. And finally, we have responded to the challenging first half conditions with an extensive restructuring and cost reduction program that will achieve its full run rate of $30 million in FY '21. We will get close to 1-year payback here, and this is about setting the business up to operate and perform through all market conditions, not just a tactical response to challenging markets. Slide 12 shows for convenience the summarized EBIT and volumes by division. I won't talk any further on this slide because the subsequent Slides 13 to 19 can go in more detail, and I will speak to each of them separately. Before I move on, though, I have one overriding comment. All metal divisions to different degrees were heavily impacted by the September scrap price crash.Now North America Metals on Slide 13. North America delivered a breakeven result despite challenging market conditions. The middle margin declined due to intense competition for lower ferrous scrap inflow and weak silver prices. Proprietary sales volumes were down 9.6% over the prior corresponding period. However, nonferrous volumes remained stable. It is encouraging to note that our technology investments are performing as expected, and providing higher material recovery. Turning to Slide 14. ANZ achieved positive EBIT margins in the first half of FY '20, which was supported by internal initiatives and a swift cost reduction response. Nonferrous volumes remained resilient. However, ferrous volumes were lower due to lower pricing, which was partially offset by continued healthy demand for ferrous scrap from Australian steel mills. Moving on to Slide 15 and U.K. Metals. The U.K. experienced a particularly poor first half. Negative EBIT margins were a result of unsold inventory in the first quarter of FY '20, which was then sold at a loss, combined with low ferrous and zorba prices, leading to intense competition for reduced volumes. While this result is disappointing, we undertook a strategic restructure and lowered the operating cost base, while maintaining operating capacity in our FY '19 levels. This puts us in a good position for any future events. Turning to Slide 16 and Sims Lifecycle Services business. Following the sale of the European compliance scheme operations, we are focusing the business on end-of-life cloud services. That includes reusing, redeploying and recycling. The word lifecycle better captures everything we do in ensuring cloud infrastructure is in use for as long as possible and stays out of landfill. The strong first half result was driven by improved recycled cloud volumes, better purchasing, a higher gold price and maximizing profit opportunities prior to the sale of the European compliance Scheme operations. Moving on to SA Recycling on Slide 17. SA Recycling was broadly impacted by the same market influencers as North America Metals, but the fall in zorba prices, in particular, materially eroded margins. As zorba prices fell from an average of USD 1,000 per tonne in FY '19, down to an average of USD 800 in the first half of FY '20, SA Recycling could not lower its shredder [ feed ] price without seriously lowering intake volumes. On to Slide 18. Underlying EBIT on a constant currency basis for Global Trading improved 17.8%, that is due to lower operating costs, partially offset by lower brokerage volumes from SA Recycling. The final segment we analyzed is on Slide 19. Corporate and Other. Two points to note here. Firstly, corporate expenses on a constant currency basis increased 4.1%, largely related to advisory fees for restructuring of business systems and processes. Secondly, Sims Municipal Recycling improved $1 million due to the agreed paper price adjustment resolution with New York City, which was partially offset by higher disposal costs. I'm going to skip over Slide 20, as it presents for convenience, a consolidated picture of volumes contained in the previous slides, and I'll move straight to Slide 21. Net cash has fallen from $350 million at June 30, 2019 to $150 million at December 31, 2019. Nearly 3/4 of this movement is related to our flagged lower operating profit, return on capital and dividends to shareholders and capital expenditure. The remaining portion, approximately $60 million relates to working capital, roughly $50 million of the movement is due to seasonality in our first half cash flow, and we saw this in FY '19 as well. There were some large provisions and credit was recognized at June 30, but paid in the first half of FY '20. My final slide before I hand back to Alistair is Slide 22 on capital expenditure. We have reduced our FY '20 total CapEx forecast to $180 million, down $25 million from our previous update. It excludes any bolt-on acquisitions in the metals or energy businesses. While the company has a sound cash position, we will remain disciplined in our approach and allocation of capital. I'll hand back to Alistair.
Thank you, Stephen. Turning straight to Slide 24. The next couple of slides are going to look at the progress of our strategic growth plan. Firstly, our resource renewal business. This business will convert 1 million tonnes of auto shred residue into high-quality products. After detailed feasibility studies, including the testing of our own ASR, we have now selected plasma gasification technology. This technology supports previous internal rates of return and will provide us with the flexibility to choose between a number of outputs and maximize commercial outcomes across Sims global footprint. Importantly, these plants primarily use our internal material that has no other use and the gasification process has excellent environmental outcomes and doesn't produce CO2. Turning now to Slide 25 and Sims Lifecycle Services. The remaining global E-Recycling business has been renamed Sims Lifecycle Services as this better depicts the activities it will undertake. The business has a strong base to grow from. It is an integrated service provider, a secure partner and enables sustainability and compliance with global standards. In this first phase of growth, we are setting the foundations to scale the business in a service-orientated and cost-effective way. We've engaged with all major global cloud providers across multiple products and regions, and I'm particularly pleased that we've delivered increased recycling the cloud volumes in this half, and are on track to achieve our target of 20,000 tonnes in FY '20. On to my last slide, the first half FY '20 results and the outlook. Firstly, to summarize the first half. It has been a half of very challenging market conditions, and the business has responded in strategically restructuring to achieve annualized cost savings of $30 million in FY '21. As I just discussed, I'm encouraged by the progress of our strategic growth plan and I believe an attractive long-term outlook remains. The outlook for the remainder of the financial year has both risks such as the impact of the coronavirus on ferrous and nonferrous demand and prices and opportunities. We still expect the second half FY '20 result to be within the previously guided range of $40 million to $60 million after adjusting for the sale of the European compliance scheme operations. Finally, before handing back to the operator for questions, I want to thank all of our employees for their dedication over the last 6 months in these challenging market conditions. Operator, back to you.
[Operator Instructions] Your first question comes from Owen Birrell with Goldman Sachs.
Look, obviously pretty tough operating conditions at the moment. I'm just wondering if you can give us a bit of color around what you're seeing with respect to seaborne demand in the last few months. I mean, through December we saw pricing rise quite materially, and it's come off a little bit. But just wondering what -- if you can give a sense on that? And I guess, associated with that what you're seeing out of Turkey at the moment?
Thanks, Owen. From a seaborne point of view, we've seen markets go up and down in terms of the actual pricing of shipping. Obviously, there was a rise in the cost of fuel when the low sulfur fuel oil parameters came in. But in terms of the actual shipments to Turkey and in terms of the numbers of cargoes we've seen hitting across to Turkey, I think they're still quite good, still sitting around the 30 to 35 ships per month. Bill, I don't know if you've got any comments on that.
Yes. I would just add that the Turkish activity has been fairly consistent. We did see a decrease in prices about 3 to 4 weeks ago of approximately 10% -- 10% to 12%. But as of today, we've gotten about half of that back. In essence, the market went from 300 to 260. Now it's back up around 280 and probably a little bit higher than that. We -- if there's a weakness, weakness is closer into China, into Southeast Asia, which has been rather quiet. There's been some activity in the subcontinent. But other than that, it's been a quiet market. That's about it.
Okay. And just, I guess, looking on that, that Asian markets, obviously it's probably pretty too early to tell, I guess, on the impact of coronavirus. But just wondering if there's any update on the nonferrous regulatory environment out of China. I mean, it's something sort of was supposed to come through mid last year, but we really haven't heard much in terms of how that market dynamic is evolving.
Okay. Well, I think you know that what was previously waste has now been classified as a renewable metal, which is obviously good for us. That's a price -- sorry, a commodity. And when you look at our nonferrous products, 90% of all our products meet that standard straight away. Given that we send probably 30% to 40% of nonferrous exports to China, the investments that we've made, obviously, I'm very pleased that we can deliver that quality and that diversified portfolio across. So from a quota system, we see that falling away by the end of this year. And that our products -- the standard is, you've got to basically be 99.3% metallic content, and we meet that standard. And obviously, from an aluminum point of view, when you're looking at twitch, and the zorbas alike, they've got to be at a 93% aluminum content. So that and the expansion of our nonferrous strategy, they're all aligned, so I think it's probably a good outcome for us in terms of that reclassification, called it renewable metals.
Okay, okay. And then just one final question for me, on the CapEx. The reduction in the CapEx by $25 million. I'm just wondering if you can give us a sense on, I guess, where is the $180 million going towards? Or what are the projects that that's underpinning that $180 million? And what was the project or projects that were deferred in that $25 million?
Yes, Owen, Stephen here. So I guess, what we're really going to focus on in this -- for the full year is maintenance, sustaining CapEx and safety CapEx. So they are going to be the #1 priority, and they're probably around $130 million, $140 million of it will be those areas. So definitely keeping the business running and no compromise whatsoever on safety CapEx. The bulk of the rest of it, we've got the Avonmouth upgrade, that finishes late January -- it finished late January, maybe by the end of February, I think it's all up and running. So that will be there. The rest of it is just sort of minor growth CapEx projects that we'd already commenced and they will continue through the end of the year. What have we stopped doing? Well, what have we deferred? It's what we considered nonessential CapEx or CapEx that was oriented towards some growth projects that were there, but whether or not we take those growth projects this year, next year or the year after, will be determined by how comfortable we are in the business and where that's heading. So I think it's just been sensible capital rationing.
Okay. And just in terms of the potential for bolt-on acquisitions. I was going to say, this market environment, and the market is probably not going to want to see you spending on any bolt-ons but ironically, it's probably the environment that is going to provide you with the greatest opportunity. I'm just wondering, is there any of your targets that you previously had on your radar, becoming more attractive around these levels?
Yes. Look, it's a good point you make. We've stated we'll be disciplined, and we will absolutely be disciplined. So they have to meet our hurdles. And probably, that's why you've seen us being reasonably quiet over the last few months because we've been -- things have been put up, but they haven't met our hurdles. I do agree that it's often times like this, which is the best opportunity because you're getting things at the bottom of the cycle. We do have some things in the pipeline. We are working through the numbers, not there yet. We will be disciplined. I guess that's probably all I can say.
Your next question comes from Jack Gabb with Merrill Lynch.
Just 2 quick questions from me. Firstly, just in terms of the -- going back to the European compliance operations sale, can you give us an update on the timing for when you expect to receive the proceeds from that? And linked to that, in terms of the restructuring charges or provisions that you've made, is the majority of that linked to the European compliance operations? Or is it a broader sort of cost-cutting program that you're making? And then secondly, just on volumes. Obviously, you -- pre the collapse in the ferrous price back in September and early October, I guess, we had longer-term targets for North America. Just kind of wondering how you're thinking about that sort of 2025 target for both the ferrous and nonferrous side now?
Okay. I'll take the -- the European sale is obviously going through the European Commission, and we're following that process. And the estimate on that could be March, April and soon as that is concluded then I would see the proceeds come in after that. So it's really up to that Euro Commission process at this stage. In terms of -- I'll let Stephen answer the provision one, but I'll just talk to about the volumes in North America. The long-term targets are still our target in terms of being able to deliver that. We still believe both the ferrous and nonferrous targets are still realistic and certainly what we're shooting for in the long term. So whilst we see a slight decline in terms of the ferrous volumes this year and then the target of $5 million that we set, I'm comfortable that the targets are correct. And obviously, when market conditions are a little bit more stable, I would expect us to be able to achieve that. The nonferrous market for us, as you can see, even during this last 6 months-type of period, the nonferrous volumes are pretty much flat, which is also a good indication that we're heading in the right direction. So very comfortable with those targets. Stephen, maybe you can talk about provisions.
Yes, sure. Looking at the restructuring and redundancy provisions. By far, the bulk of those are in the U.K. and NAM. From a materiality point of view none fit in Europe. The main implication of the -- in terms of significant items of the sale of Europe on the compliance scheme operations is the businesses that were [ left ] in -- that the businesses we still own that are [ left ] back in Europe, they had intangibles, which we've impaired to the tune of $13 million. Now they used to be part of the wider Europe CGU, the cash-generating unit. But since we've sold the European operations, I'll be frank, they didn't stand on their own in terms of the valuation of those intangibles and goodwill. So we wrote off around about $13 million. But just reiterating my first point, the restructuring and redundancy provisions around us, I think, taking very sensible restructuring in both the U.K. and NAM.
And has the -- some of that restructuring been yard closures in the U.K., I think you were looking to focus on some of the bigger yards, not necessarily reducing the potential volumes longer term, but just more of a cost move. Is that right?
Exactly right, exactly right. So we've sort of closed or shuttered 11 yards and we've taken the volumes that they were producing down to 4 of our existing yards. So we've beefed up those 4 yards a bit to handle the volume. So we fully expect to be able to handle the same volumes we handled in FY '19. We heard that no capacity has been removed. We're just saving the costs on these 11 sites, which I think, again, was a solid and logical rationalization.
Your next question comes from Lee Power with CLSA.
Sorry, just continuing on from Owen's question. Do you factor in any further recovery in Turkish prices in your guidance for the full year?
At this stage, we're still looking around the $280 -- $250 to $280 mark. That's where we're sitting today. I think it's a little bit early. I'm obviously working with the team and just watching very carefully the global sort of growth, and that's all related to the virus in China and whether that's actually going to be contained, and we can see a more stable environment. I think at this stage, that's the guideline we sort of are looking at around the $280 mark. Hopefully, the virus can be contained, and we can see more stability, and hopefully the price move up. But at this stage, we've been cautious in operating between $250 to $280 per tonne in terms of ferrous. In terms of zorba pricing around the USD 1,000 mark, maybe slightly over that. But again, both of them are watching the Chinese outcome of the virus.
I might just add one more thing there because I think the implication of what I infer from your question is higher prices would automatically lead to a higher outlook. And maybe that is the case, but it's very important that there's lots of factors. So the buy price is important. So if we -- I'll give you a for example: if we're headed to higher prices, but there was a very aggressive competition that came into the market and that margin was eaten away, the higher price in and of itself might not lead to a higher outcome. Having said all that, clearly, we'd be pleased with higher prices.
Okay. And then just on the U.K. restructuring, can you give us an idea of how much lower the breakeven point is or maybe like breakeven tonnes or some sort of metric we can look at?
Look, I can't. Off the top of my head, I can't, no. Let me think about that question a bit more because it is quite a complicated question around -- particularly around these levels, we have breakeven as volumes versus margin because the margin is going to be probably -- I'll be frank, just as important as volumes in the U.K. for its breakeven. So as much as I'd love to give you a rule of thumb, I think it is a complicated combination of those 2.
Okay. And that was kind of going to lead into my next question, which is hitting the full year guidance. Is it more a question of volumes coming back or is it a cost-out story?
So I think it's all -- it's 3, because I'll add in margins as well. So the cost outs have happened, we're just about through them. So we'll hit the full run rate certainly by the time we get to the end of the year. So I absolutely expect the cost reductions to be contributing to our guidance. We would need to see volume -- but it'd be good to see the volumes solidify around these types of levels and get -- and see some margin coming back into the business. So we're not -- we haven't got overly optimistic assumptions as you would naturally assume, in that confirmation of our guidance. And I think we've probably summed up the risk factors pretty well. So it's all 3, but there's no particularly heroic assumptions on any of those 3 that we have.
Your next question comes from Peter Steyn with Macquarie.
Just probably carrying on, on that tangent. The $30 million cost out that you're targeting, could you give us a bit of sense of that geographically, Stephen? Is it -- I presume the U.K. is making an outsized contribution, given what you've done from a site perspective. But could you give us a better sense of that?
Yes, okay. Look, you're right, the U.K. is making a larger contribution because that's clearly -- we've closed the sites. We haven't closed sites in NAM. So it's split, it is split between the -- between U.K. and NAM. It gets a little bit complicated, but I would say you're probably looking at 3/4 of it at least is coming from the U.K. in terms of contribution from that restructuring redundancy provision, the balance from NAM and a small amount from Australia.
Perfect. Then I was curious just to get a little bit more detailed perspective from Bill around Turkey and how you guys are thinking about the progression of that market, both domestically and from an export perspective, obviously, there's been a lot of moving parts. If you could give us a bit of clarity on that, that would be great.
Yes, Peter. It's -- the Turkish market domestically appears to be slightly better than it was this time last year. The winter is always a difficult time there. Construction, regardless of the veracity of it, will slow down. But the signs for spring and some incentives that the government has put in with lowering interest rates, et cetera, have given a better outlook. I wouldn't call it a bright outlook, but a better outlook. As far as the export market goes, over the next few weeks, we should see what the European quota will be for Turkey, which will give them another outlet. Their biggest, as you probably know, Peter, export destination is North Africa, and the GCC, to some extent. Asia is an important add on, but not totally critical. North Africa seems to be in an okay shape, demand seems to be consistent. Pricing is difficult for the Turks today. Rebar pricing was in the -- excuse me, $430 range about a month ago and is down into the $415 to $420; and billets have gone below $400 to around $390, but that seems to have solidified the market there, and prices have slowly started to increase. As far as scrap prices go, going into January, I was relatively optimistic about, not just Turkish demand and steel in general, but worldwide demand. It looked like we were finally going to come out of the worldwide manufacturing recession that we've been in for over 18 months. And there are a lot of macro pieces that made things look better. And the first thing, of course, was the U.S. and Iranian issue, which essentially stopped the market for the first couple of weeks in January. And then more and more news came out about the coronavirus, which certainly made people sit and wait. But regardless of that, after that 2-or-so week period, the Turks did come back to buy, and as Alistair pointed out earlier, the number of cargoes they're buying is about on average. So they continue to operate. They continue to fight, work on probably lower margins than they would like to, but they are continuing to melt. The operating rate hasn't decreased from where it was in the last quarter of '19. And the surrounding areas have been fairly active as well, whether that be Egypt or Greece or -- the GCC has been fairly active as well. So as the market got down under $300, that brought a lot of people back into the market. We'd solidified it and why it bounced back up into the 280s. I'm not sure if that answers your question, but...
Yes, that was a broad around the ground. Just one last quick one. On China, in particular, Alistair, 10% of your sales last year. You now have a little bit more of an incentive to focus on that market given your competitive position. How do you think about that strategically from a pivot point of view?
In terms of our nonferrous to China, Peter?
Nonferrous, yes.
I think the overall strategy is that we wanted to be able to have our nonferrous products being able to be sold around the world, and China obviously is a large part of that or 30% to 40%. The Southeast Asian region, when you look at China, India, Malaysia, that entire region is obviously the focus for a lot of our nonferrous sales. And I think technically we've done what we needed to do, which has given us the capability of varying qualities. And if there's a premium in a quality product, then we can go after that. And so I think we've diversified our customer base, but also giving ourselves the technology to be able to sell and hopefully extract premium in the coming years.
Your next question comes from Simon Thackray with Jefferies.
I'm probably a bit slower than the rest. So I just really want to try and step this through. You've got a targeted exit run rate on cost savings of $30 million this year, 3/4 plus coming out of the U.K. on consolidation. You got an assumption of ferrous prices of $250 to $280, zorba at $1,000. All things being equal, prices weren't anywhere near that in October when you gave your last update and yet the guidance is unchanged. So I mean, you can call it conservative, I presume. But does the math actually makes sense? I just need you to maybe waterfall for this or step me through because things have improved, and the way you always explain things, Bill, was that 6 weeks to build a cargo, forward sold, those prices were improving dramatically through November and December in terms of ferrous scrap. That should be a good quarter -- Q3 for the business, all things being equal. And the one thing that seems to be missing from the pack -- this result is that, that wonderful quarter-by-quarter sort of EBIT performance. That seems to have disappeared. So it's leaving us -- leaving me -- so I don't want to say us, leaving me a little bit more confused about how you get to this guidance given the condition's improved in the final -- in the final parts of 2019, they should be benefiting you in the third quarter. So are you assuming a much weaker fourth quarter? Or how does this work? How does the math work?
So Simon, it's Stephen here. Let me try and pick that apart of it, and I'm sure that Alistair and Bill will chime in as well. So there's a few things in there. So let me go through some of them. Firstly, we had absolutely initiated our cost-out or begun to understand what our cost-out program was when we came out. So we reacted to that very, very swiftly. And while we're implementing it now, that was built into our full year guidance. So we knew that we were going to about -- what we were going to do. It's going to take us a while to implement it, but that was certainly built in there. So I wouldn't view that as additional. Secondly, and I think it somewhat relates to the points I've talked about before, price is absolutely one of the components but the other component you have to look at and one which is -- it's just as difficult for us to forecast as it is for the market to forecast is what is the level of competition going to be. What is the buy price going to be at particular levels. And we have seen -- particularly in this first half, we have seen some fairly aggressive buy price activity. I mean, some of it doesn't completely make sense to us because we can't see how you're making margins at those. But I guess, in a market that's been as volatile as it has been, and some of the volatility has been extraordinary. We're just sitting back and having a look at it the other day, we've had 10% and 20% swings month-on-month, both up and down on pricing, and that makes understanding where your buy price needs to be from a competitive point of view, very, very difficult, so may be [ difficult there ].The third comment I'll make and -- before Bill and Alistair want to chime in. We actually got very strong feedback from our shareholders that they didn't like the quarterly slide, that they thought it added volatility to our business and made it much more short-term focused than it should be. So I guess, they've listened to those shareholders. I acknowledge as analysts, you might not be overly happy with that, but we've listened to that feedback and not included that slide.
That's very helpful. I have to say. The only concern that I have is that it's price commodities, price volume, they all go together to have that kind of underlying volatility in buy prices, and there was some explanation for North America in terms of seasonality as well. But if we're saying it's a highly volatile environment, I accept it's harder to give guidance. So it's very difficult for me to understand with any kind of clarity what 3Q or 4Q could look like. It feels like a bit of a dartboard from the way you're describing how volatile the environment is. So I mean...
I wouldn't describe it as a dartboard and I guess what we're saying is...
Well, you just described the buy prices being highly volatile, moving 10% to 20% -- 20%.
Yes. So what I described...
That's pretty volatile.
Yes, it is. And I've described that is what we've just been through. But bear in mind, that was driven by a scrap price crash in September that was around 3 standard deviations from the norm. So we're talking a very significant event. And as it recovered, it recovered in a very volatile fashion and that caused volatility in the buy price. We have seen some stability return. We've absolutely seen some stability return and that is one of our assumptions. I will make that very clear, one of our assumptions when we're looking at where we think we're going to come in at the year-end is that somewhat level of stability that returns remains. If it went to another highly volatile market, I don't know the coronavirus, who knows what could cause that level of high volatility, then that would clearly be a major change to our assumptions.
Okay. That's helpful. Can I just swap across to something that I also don't understand, but it looks pretty interesting is this cloud recycling. You made a reference to the link to the gold price. I probably didn't understand. I don't understand what the drivers of that business are. So I just wanted to understand a little bit more about that reference to the gold price? And also, it sounds like a pretty attractive large market growth market, just what the current competitive environment is in the recycling of the cloud and what you expect it to be over the next sort of couple of years?
Yes. Sure, Simon. So the reference to the gold price actually references more with our business that we sold on 30th September. So what we're saying is that traditional scheme operations did quite well in the first quarter partly because of the gold price. The gold price doesn't have a big influence on recycling of the cloud. We do view it as a potentially very good opportunity. I guess, what I've been saying -- not what I've been saying, what we've been consistently saying over the last year, what we find attractive about it, is it's low on capital, so it's a no-regret strategy for us. We can cycle the costs up and down very quickly if the market volumes rise or if they don't rise, we can pull it back pretty quickly. So we review it as a no-regret strategy because it doesn't involve capital. I guess, we view it as an attractive market for us for a number of reasons. One is it's global and Sims is very much a global player. The type of companies we deal with are -- the names as you expect are the large global providers of cloud services, infrastructure-as-a-service, as they now call it, to large players. So they are interested in dealing with a large reputable industry player, which we are. And I guess, thirdly, and over the last 5 to 10 years in our ITAD business, which is our IT asset disposal business, we have actually built up a lot of expertise in this area. So we think it all comes together. I will admit it's a blue sky opportunity, but we view it as a low-risk blue sky opportunity.
And I might just add one other comment there is that in terms of competition there, there are other competitors in this in the U.S.A. But from what we can see at this stage, they are not global competitors. And obviously, one of the key focuses is for any one of our large customers, goes around the security of managing their product. So we do have an advantage in that sense as well.
That's helpful, Alistair. And then one real quick one to wrap up. Just ANZ, another good performance from that division. You cite sort of good strong domestic demand for scrap, and Bill's point about Asia being quieter from the sort of global trading perspective is obviously pretty well known. Just in terms of the -- if you can, just in terms of the split between sort of the export tonnes and the domestic tonnes and that relative resilience of ANZ, and I'm probably a little surprised, I thought that maybe it did feel that Asian pressure a little more in this half. What are you expecting for the second half then as well for ANZ?
The split would remain pretty much the same as it is and has been for a while. So it's just a 50-50, pretty much domestic versus export. So there's a solid demand for both. Naturally, we watch the pricing, but I think the export volumes should be the same as what we saw in the first half.
Your next question comes from Daniel Kang with Citigroup.
Just maybe a question for Bill or maybe Alistair. In terms of zorba pricing and U.S. domestic scrap pricing, they rallied and they actually sustained their strength. Just be good to hear your thoughts on the drivers here and whether you expect this strength to maintain.
I'll take the zorba pricing issue first. And obviously, we're just over $1,000 -- close to $1,100 per tonne at this moment. And from a stable market environment point, it's good that we've seen that rise in zorba pricing from the lows of $800s early in last year. Part of that has obviously got to do with China in terms of that economy and whether that upswing is going to come to see if any of those zorba prices rise, but we're suggesting that it's going to stick around the levels that you're seeing today and the drivers really is the motor car industry. So that is something we've got to watch very carefully across the globe. In terms of the U.S.A. domestic scrap pricing market, I'll hand over to Bill over there. But I think the one thing I would comment on is the volatility we saw in domestic scrap pricing for ferrous last year.
Daniel, you're mostly interested in nonferrous or ferrous in the U.S.?
Ferrous, Bill.
Ferrous, okay. Yes. No, I think the outlook is pretty good for ferrous in U.S. for the whole year. There are finally some infrastructure projects that are being funded. The outlook, I think -- the order books that I speak to about with [ new cores ] and others are fairly solid. Plate may be a little bit weaker than they would like, but [ fly ] products seem to be going pretty well. That doesn't mean that the market hasn't been volatile. It's been extremely volatile, probably more volatile than the export market over the last, say, 8 months from July to February. And I think the next couple of months, that volatility will abate a bit. I think we'll get off the 10% changes every month to something more reasonable, at least that's where it appears to me now. But of course, that is affected by the international market. So it's really difficult to make an accurate judgment. But I'd say it will be less volatile in the next few months than it has been.
Just another question in terms of the buy price. I think, in your guidance, you mentioned that you've noted some softening in terms of the aggressive competitor behavior on the buy price. Typically, do we tend to see competition reduces prices rebound?
I think when you see pricing increase, and I'll take you back, maybe 18 months, 2 years ago. When you see prices up in the 300, 350 range, there's obviously a lot of scrap that flows in that sort of price levels. And whilst there's competition, there doesn't seem to be that much of a buy price fight, that's more relaxed and given the volumes are flowing and people can actually extract their margins. What we've seen is when pricing becomes difficult is when we see the prices down in the 250 mark and volumes are starting to slow down and individuals have committed to a sale, then you see a lot of competitiveness. And that could be literally within 5 miles of an operation. And that's where, I think, a little bit of the competition that we talk about in the buy price does affect the competition in a particular region. And we've seen in the U.K. and in the U.S. in certain parts of those countries where we have a higher level of competition on one coast versus another or a domestic versus an export competition in the U.K. So I think pricing and that competitive environment is quite specific to regions.
[Operator Instructions] Your next question comes from Brennan-Chong with UBS.
James Brennan-Chong here. Just a couple of clarifications on what you think the reclassification of China's nonferrous material will mean. Positive to see that 90% of your products will be making that threshold. So 3 quick questions on that. One, what do you expect will happen to the remaining 10%? Two, do you expect any costs of compliance to ensure that your 90% of your both nonferrous bonds will get in? And thirdly, at a macro level or an industry-wide level, do you think that you are standing out, being able to put in 90% of your volumes into the Chinese market once this reclassification is done? Or do you think that the broader market will also be able to get 90% of its volumes into China as well?
Good questions. The 10% of our products, you talk about, and as I said, we send 30% to 40% of our product actually goes to China. So we are quite comfortable that we are capable of delivering that 90% to China. But the remaining 10% is markets and if we don't have to have higher operating costs for those 10% then there's markets for that. So quite happy with that 10% and where that goes to. In terms of your second part of your question, there are very small packaging costs that we've noted that China regulations have asked for packaging to be quite specific, sort of onetime bags. So there's a little bit of cost around that, that we would need to do, but nothing major. Then the third part of your question in terms of the macro and does Sims stand out? I would say we're probably leading across our group in terms of the technology we've already installed. I know some of our competitors are still going through that process. So in typical engineering fashion, you probably get a year ahead of anybody else and then they catch up. So for us, it's really about managing our costs in producing those products, keep them as low as possible and make sure we diversified and have a home for all of our markets, and we are aggressively wanting to grow that business, the nonferrous as per our strategy.
Right. Okay, great. Good color. And then just finally, Slide 24, just on the strategic growth converting ASR into gasification process. I may have missed it. Can you just remind me, have you chosen a location for this site? And given that you've started to engage the government, do you have any initial CapEx numbers, please?
No, at this stage, we haven't opened up the locations. We're obviously reviewing that. So we haven't negotiated. But the first one we are planning on building will be in Australia. And as in any good project management process for us, the location is going to be part of the discussion with EPAs and the local governments. It's more than just 1 project, it's also about relationships going forward. So at this stage, whilst we've chosen the technology, we need to go through the next feasibility phase, and that will give us a level of comfort around costing. So that will only come out after the next phase.
Right. And do you have any budgets on how much you're going to spend on studies and all that over the next 12 to 18 months?
The Board needs to obviously approve. We've -- so we finished the pre-feasibility study, which is rather small in terms of capital. It's not significant at all. But the next phase in the feasibility study is probably $3 million, $4 million at this stage, and that's fairly small.
Your next question is a follow-up question from Lee Power with CLSA.
Just a quick follow-up on the cloud recycling. Can you just remind me what the split in terms of tonnes in that business is between recycling like obsolete equipment into its base material versus reselling components?
Going forward, because the historic one will be completely dominated by the noncloud stuff, because that's what we were doing. Look, going forward -- let maybe get back to you through Angela, because I -- off the top of my head, I don't know what the split is strategically. I mean, what I would say strategically, our big focus will be on the cloud, but we do have a baseline of ITAD business that we still continue. But for your -- from your perspective, I think should assume that most of what we want to do will be cloud going forward and that will start to dominate. But let me get back through Angela, if I can.
There are no further questions. And that does conclude our conference for today. Thank you for participating. You may now disconnect.