Imagine a person who devised a strategy to short Blackmores Limited (ASX: BKL) and go long Whitehaven Coal Ltd (ASX: WHC) at the beginning of 2016. At the time you'd have said they were crazy, but that person would actually have made a very nice return on their investment.
Going short basically means to bet against a business, or at the very least its share price. Blackmores, a producer of vitamins, generated stunning returns for investors in 2015 on the back of insatiable demand from China. This year, however, its shares have virtually halved in price as a result of concerns related to China's regulatory environment, combined with a slowdown in sales growth.
Whitehaven Coal, on the other hand, continued its sharp descent in 2015, going from around $1.50 a share to just 70 cents. It hit a low of 35.5 cents in February, but has since exploded in price. One share is now fetching $2.765, down 3.3% for the day, but up 295% year-to-date and 679% since that February low.
So, what caused the glorious Whitehaven Coal rebound?
With the rise of renewable energy, many investors (justifiably) assumed a structural decline in demand for coal would continue. Coal prices had plummeted for a number of years, dragging the share prices of the businesses that produce it to fresh lows.
But prices for both metallurgical and thermal coal have rebounded strongly in the time since, silencing many of those critics. This has largely been driven by Chinese policies limiting Chinese coalminers to working 276 days per year, thus restricting supply in the market.
Shares of New Hope Corporation Limited (ASX: NHC) have also benefited, as have shares of BHP Billiton Limited (ASX: BHP). In fact, according to The Australian Financial Review, analysts even expect BHP's coal division to switch from a loss last financial year to contributing 20% of the entire company's operating profit this financial year.
Should you buy?
Whitehaven Coal has regularly featured among the ASX 200's best performing shares in recent times, and has no doubt caught the attention of some investors. Before investors get too excited, however, they should be cautious: coal prices have already rebounded significantly, and there is no guarantee they will continue to climb higher.
Morgan Stanley recently called the peak of the coal price rally after China relaxed some of those production limits. The AFR quoted analysts as saying:
"We see the latest round of relaxation as aggressive. Not only has the government relaxed production caps for as many as 789 projects, new mines under construction are also allowed to resume. This shows the government's determination in adjusting coal supplies."
There are no guarantees, of course, but companies like Whitehaven Coal are very much at the mercy of fluctuating coal prices. That's just something to keep in mind before you consider jumping in for a piece of the action.
