The BHP Group Ltd (ASX: BHP) share price has fallen by approximately 30% over the last two months. But that’s the past. What is the outlook for the company?
What is happening to the BHP share price?
Resource businesses are dependent on their respective commodity prices to generate higher profit. When the resource price falls, it can lead to the prospective profit falling.
It’s operating across a number of different commodities including iron ore, petroleum (for now), copper, nickel and metallurgical (steelmaking) coal.
In FY21, the business generated an outsized level of profit from iron ore. Looking at the underlying earnings before interest and tax (EBIT), the iron ore division generated US$24.3 billion of the total US$30.3 billion of underlying EBIT. Copper was the only other major contributor, with US$6.8 billion of underlying EBIT.
That means that iron ore generated around 80% of the business’ underlying EBIT, it plays a very important part.
However, the iron ore price has fallen significantly over the last few months. In May 2021, it was well above US$200 per tonne. It is now around US$118 per tonne.
That would suggest that BHP isn’t likely to earn as much profit from its iron ore division over the next 12 months as the last 12 months. The BHP share price can be affected by investor’s expectations for future profit.
The resources business outlined a number of thoughts for its outlook in its FY21 report.
BHP said that it remains positive in its outlook for long-term global economic growth and commodity demand. It expects population growth, the infrastructure of decarbonisation and rising living standards will all drive demand for energy, metals and fertilisers for decades to come.
Regarding steel, BHP said it expects that Chinese production will grow by around 5% in the 2021 calendar year. It also said it anticipates a continuation of strong end-use demand conditions in China and an ongoing recovery in the rest of the world over FY22.
However, BHP did say in the medium-term that Chinese demand for iron ore is expected to be lower as crude steel production levels out and the scrap-to-steel ratio rises. In the long-term, prices are expected to be determined by high cost production from Australia and Brazil. Over time, the direction of the iron ore price could have an important impact on the BHP share price.
Copper prices have been strong, the rest of the world demand is recovering and BHP said the Chinese economy continues to perform well. Management believe the short-term outlook demand remains constructive. In the longer-term, both demand and supply factors indicate to the miner that copper is an attractive avenue for future growth.
Potash is a new focus for BHP. The resources giant notes that potash prices have increased sharply over the last 12 months, despite ongoing excess production capacity. Over the longer-term, the company believes that potash will benefit from a number of global trends including: rising population, changing diets and the need for sustainable intensification of agriculture. That’s why it has approved spending US$5.7 billion of capital on the Jansen Stage 1 potash project in Canada. This project is expected to produce approximately 4.35 million tonnes of potash per annum. First ore is targeted in 2027.
Broker thoughts on the BHP share price
One of the latest thoughts on BHP is from Morgans, which has a hold rating on the business, though the price target is $45.20. The broker is expecting continued weakness for iron, however the strength for coal can make up some of the difference.
According to Morgans, BHP could pay a grossed-up dividend yield of 9.2% in FY23.
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Motley Fool contributor Tristan Harrison owns shares of Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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