It certainly has been a year of ups and downs for the BHP Billiton Limited (ASX: BHP) share price.
The mining giant's shares started the year around the $25 mark, drifted as low as $22 in June, and today find themselves close to the $28 level once again.
Will they climb higher in 2018?
I believe the BHP is well-positioned for a strong FY 2018, leading to the possible outperformance of its shares during the next calendar year.
The key driver of this will of course be commodity prices. This month numerous brokers including Citi, Morgan Stanley, Goldman Sachs, and UBS have come out with favourable views and forecast upgrades for 2018 due to robust global growth and strong demand.
Iron ore and oil prices are amongst those tipped to improve in 2018, which is vitally important for BHP. Almost two-thirds of its EBITDA was generated through its petroleum and iron ore businesses in FY 2017.
I would agree that recent economic data supports this view for iron ore and oil prices. And although U.S. oil output is likely to increase in 2018, I feel prices will remain favourable for producers due to the improved demand.
It is a similar story for iron ore as well in my opinion. Although prices weakened earlier this year, they have bounced back in recent weeks on the back of strong steel demand. I expect prices to remain in and around the current level for much of next year.
All being well this should lead to bumper profits and strong free cash flow generation for BHP in FY 2018, which will then find its way to shareholders in the form of dividends or through share buybacks.
Overall, I am bullish on resources shares at the moment and BHP is my preferred pick in the sector, followed by Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO).
