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Macquarie Group Ltd (ASX:MQG) says this sector is facing an impending profit upgrade

The ratcheting up for the trade war between the US and China will be a drag on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) but there’s a sector that is still likely to enjoy consensus profit upgrades in the coming months.

I am talking about the mining sector where analysts have yet to reflect the higher commodity prices into their forecasts due to the volatile geopolitical environment, which seems to have been made worse by US President Donald Trump’s decision to slap a 10% tariff on an additional US$200 billion of Chinese imports.

The price of most commodities is trading lower as a result but key minerals like copper have bounced off their intra-day lows. Perhaps it’s a case of “sell the rumour and buy the fact”.

But the performance of base metals like copper is irrelevant to our biggest miners BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32), according to Macquarie Group Ltd (ASX: MQG). It’s the strength of the bulks (like iron ore and coal) that will drive the upcoming upgrades.

“After a brief hiatus we believe the earnings upgrade cycle for the diversified majors has resumed,” said Macquarie.

“While there is some downside risk for most base and precious metals, spot prices for BHP, RIO and S32’s core commodities are all trading well above our forecasts for both the short and medium term.”

Among the commodities that are trading higher than Macquarie’s forecasts, alumina is the standout as it is around 60% and 90% higher than the broker’s FY19 and FY20 assumptions, respectively.

The spot prices for manganese and coal are also significantly above Macquarie’s FY20 forecast and the upgrades to these commodities will drive South32’s valuation higher given that these are key outputs for the miner.

If you are wondering what this means for South32, Macquarie noted that current commodity prices will lift the broker’s earnings forecast for the miner by 50% in FY19 and 100% in FY20 and FY21.

I suspect other brokers will also come to a relatively similar conclusion and the stock looks like a good buy at current prices.

What’s also interesting is that Macquarie believes the upgrade cycle is likely to benefit BHP more than Rio Tinto.

“Our preference for BHP over RIO is supported by the earnings upside under a spot price scenario. BHP’s exposure to hard coking coal and oil prices give it a clear advantage compared to RIO,” said the broker.

“We note that running spot prices into perpetuity drives a ~34% increase in our NPV [net present value] for BHP, compared to just 4% for RIO.”

I hold all three stocks and I believe they represent good value although I too have a slight bias for BHP. This is because it is about to undertake a huge capital return from the US$10.8 billion sale of its unconventional oil and gas assets in the US.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Macquarie Group Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.