What: The travails of the iron ore and coal markets is front and centre for commodity investors today with both Fortescue Metals Group Limited (ASX: FMG) and New Hope Corporation Limited (ASX: NHC) making headlines.
In the case of Fortescue, according to a report in the Australian Financial Review, broker Morgan Stanley has issued a note suggesting the iron ore major could have to consider asset sales – such as port and rail infrastructure assets – to shore up its balance sheet.
Meanwhile, New Hope, which counts Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) as a major shareholder, has released its half yearly results. Despite solid production numbers and tight cost controls which led to a 51% jump in underlying interim profit, the outlook for the second half remains very challenging.
So what: With the iron ore price down around 60% over the past 15 months some investors are no doubt tempted to contemplate buying Fortescue given the beating its share price has taken. They will need to tread carefully. There is no reason the iron ore price can't fall further and based on Morgan Stanley's analysis the stock could be headed to $1.65 which is significantly lower than its current trading price of $2.02.
It's a similarly troublesome outlook for coal with the ABC news website reporting that analysis from The Institute for Energy Economics and Financial Analysis is suggesting the outlook for the coal price remains bleak with China's demand for coal rapidly falling as the nation looks to replace its energy needs with cleaner fuels.
Now what: It's hard to get excited by the contrarian investment proposition for producers such as Fortescue and New Hope despite their beaten up share prices. The case for adding these two stocks to a portfolio appears unappealing, particularly when the alternative is buying quality companies which are available at enticing prices and with very positive outlooks for growth. Want to know more about stocks with positive tailwinds…
