EUR 850.00 For Business Accounts Only

Morningstar | Stronger Chinese Steel Production Benefits Coking Coal Near-Term, Shares Close to Fairly Valued

China plays a defining role for Teck as the biggest buyer of everything the company digs out of the ground: metallurgical coal, copper, zinc, and lead. With the exception of lead, demand for these commodities is tied to fixed-asset investment. We expect a rebalancing of China's economy from investment to household consumption will mean weaker demand growth for investment-oriented commodities and lower prices than Teck has enjoyed in the past. Teck produces high-quality metallurgical coal. The price of met coal, which is used in steelmaking, benefited from China's fixed-asset investment boom. Amid weaker Chinese steel demand and lower domestic Chinese freight costs, we expect China's met coal import needs to decline, particularly once supply-side reforms on domestic coal mines are complete. We expect global seaborne demand growth to shrink. India is expected to be the main source of incremental demand; however, we forecast that this will be insufficient to offset the falls we expect from China, with domestic supply taking share and shrinking overall demand, given forecast declines in steel consumption and greater scrap usage. With its decent cash cost position, we expect Teck to remain profitable, though much less so than it was previously. Teck is one of the higher-cost copper producers we cover. There are considerable differences in cash costs within the portfolio: The high-grade Antamina mine in Peru is viable under nearly any reasonable copper price, while mines in Canada and Chile might struggle in the years to come, as we expect copper prices to sag on weaker Chinese demand growth.Teck's zinc/lead business has historically generated solid profits, thanks to attractive ore grades at the massive Red Dog mine in Alaska. The asset's high grades and relative capital efficiency should see this business comfortably in the black. The Fort Hills oil sands projects sees production of oil from 2018. It diversifies Teck's portfolio, but we expect fairly mediocre returns. Production of oil from Oil Sands comes with relatively high operating costs, while the bitumen product attracts a discount to crude oil benchmarks. The operations are highly capital-intensive.