Should You Buy New Hope Corporation Limited at this Share Price?

What Happened to the NHC Share Price?

New Hope Corportion Limited [ASX:NHC] did slightly worse in today’s morning trading. The stock was trading at AU$2.19 a share. The Aussie market was much stronger on the news of planned cuts from the Brazilian giant Vale. After yesterday’s over-bearishness from a soft US GDP number, the market is once again ready to bet on an interest rate cut in Australia next week.

Why Did This Happen to NHC Shares?

With rebalancing taking place in the commodity market, investors are re-entering mining stocks. For oil, price has been reflating. For iron ore, it is much the same thing. There is a likely recovery from the Chinese demand side due to loosening measures. On the supply side, cuts to expansion and production are finally starting to happen.

How will coal producers do in 2015? Will they also recover in value?

The stock’s falling value should not be anything of a surprise. It has reduced as coal price has halved in the last few years. Is coal facing a reflation similar to other commodities? The short answer is yes. A reflation in energy prices will produce inflation in the prices of other commodities such as coal.

For the year 2015, a fundamental estimate of coal price puts it at around US$67 a tonne by year end. This will of course be a step up from its current price at around US$60. In that scenario, New Hope’s stock price will gain.

What Now for NHC?

However, there is a catch. Unlike some of the other commodities in the market, coal has a structural problem. While there is no doubt that emerging markets such as China and India will continue to rely heavily on coal in the years to come, it is also undeniable that coal will be structurally out of favour in the future.

Coal is a relatively cheap source of energy and emerging markets rely on it. However, the terrible pollution in countries such as China has made coal ‘an enemy of the state’. I am the emerging market analyst at Port Philip Publishing. I have a home in Beijing and I have investments in China. From my frequent travels and time spent in China, I can tell you that renewables will be the way of the future for that country.

However, I can also assure you that China and India are still going to be heavy users of coal for many years to come. India will double its coal consumption in the coming years, and China still has 70% of its energy production in coal. This will not end anytime soon.

However, the ‘coal bull market’ has ended. It had a good run in the last decade and it has slowed down considerably.

Coal is a simple trade. By that I mean it is relatively easy to produce a consistent return from the commodity. If you started trading coal in 1970 and you have been a low frequency (long/short) momentum trader, you would have increased your net worth by more than 7.7 times. However, returns from trading coal deteriorated significantly. You would have been lucky to produce an annual return of 4.03% in the last 12 months.

Right now, coal offers the benefit of low risk, but it also gives very little in return.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor


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