Why It’s Time to Avoid Teck Resources

Declining global economic and industrial activity and a worsening outlook for the demand for coking coal and base metals make Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK) a company for investors to avoid.

| More on:
The Motley Fool

Slowing industrial activity in China and diminished construction activity coupled with contracting European economies don’t bode well for the demand for iron ore, steel, coking coal, or base metals as prices are expected to contract further. This is significantly impacting the bottom lines of commodities miners like Teck Resources Ltd. (TSX: TCK.B)(NYSE: TCK), whose share price plunged a massive 17% year to date on the back of weak financial results.

While some analysts claim the company is undervalued, I believe there is further pain ahead for investors.

Falling commodity prices and a grim outlook 

Around 42% of Teck Resources’ revenues are derived from coking coal, a key ingredient in the steel-making process, but the news couldn’t be worse. It was only earlier this month that coking coal hit its lowest price in four years, at US$113.50 per ton, and prices will remain depressed for the foreseeable future. This is because of oversupply and softening demand.

Declining construction activity in China is also having a significant impact on the demand for steel. As demand falls and stockpiles grow, it bodes poorly for coking coal. There are also signs that China’s real estate bubble is about to burst, with investment in real estate development in terminal decline since the start of the year. This would further hurt demand for steel and push coking coal prices lower.

The news gets even worse for investors: The declining industrial activity in China is also affecting the demand and prices for base metals, with copper and zinc making up the remaining 68% of Teck’s revenues.

For August, China’s industrial purchasing managers’ index fell 60 basis points compared to July to 51.1 points despite the government’s introduction of a range of stimulus measures earlier this year aimed at boosting industrial activity. As China is now the world’s largest manufacturer and base metals, in particular copper, are important components in a range of industrial goods, this doesn’t augur well for base metals prices.

More concerning is that a key consumer market, the European Union, continues to see economic activity contract, with fears of deflation still growing. Consequently, consumers are delaying purchases and affecting demand for China’s manufactured products. These factors are also further fueling a global economic malaise with Brazil, the world’s sixth-largest economy, slipping into recession as demand for its commodity and manufactured exports continues to decline.

Despite falling demand for commodities, diversified global resource giants BHP Billiton and Rio Tinto are expanding production, using their size and scale of operations as a means to create cost savings, generating greater supply and placing more pressure on commodity prices.

Softer commodity prices hit Teck’s financial performance

The impact of this declining demand for commodities can be seen in Teck Resources’ second-quarter 2014 results, with net income plunging a massive 44% compared to the equivalent quarter in 2013. While there may be some upside as the company focuses on driving down costs, the increasingly softer outlook for coking coal and base metals will only have a deleterious effect on Teck’s financial performance.

I expect all of this to continue for the foreseeable future, making Teck Resources a stock to avoid until there are signs of a sustainable uptick in global manufacturing and economic activity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Investing

A close up image of Canadian $20 Dollar bills
Dividend Stocks

This High-Yield Dividend Stock Is a Monster Passive-Income Machine 

This top TSX dividend-growth stock offers a 7.4% yield.

Read more »

path road success business
Bank Stocks

Scotiabank Is Down 0.9% After Earnings: What Investors Need to Know

Bank of Nova Scotia (TSX:BNS) released earnings yesterday. Here's what you need to know.

Read more »

Hourglass projecting a dollar sign as shadow
Dividend Stocks

For a Shot at $5,000/Year in Passive Income, Buy 6,850 Shares of This TSX Stock

Whitecap Resources is a monthly dividend stock that offers you a tasty dividend yield while trading at a cheap valuation.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, May 29

Besides more Canadian corporate earnings, volatile commodity prices could give further direction to the TSX benchmark today.

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset

3 Soaring Stocks to Hold for the Next 20 Years

These three stocks are good bets for the long haul, given their healthy long-term growth prospects.

Read more »

grow dividends
Tech Stocks

Celestica Stock Is up 44% Since Earnings: What Investors Need to Know

Celestica continues to benefit from strong demand and production efficiencies, yet the stock remains undervalued.

Read more »

A plant grows from coins.

2 Dividend Stocks Paying 5% or More That Could Beat the Market in 2024 and Beyond 

Here are two top dividend stocks long-term investors may certainly want to consider for their yields and growth profiles right…

Read more »

edit Balloon shaped as a heart
Dividend Stocks

Love Value Stocks? 2 That Are Screaming Buys in May 2024

Patience can pay off by investing in these two value stocks with nice dividends and the potential to turn around.

Read more »