Will BHP's share price be defined by coal in the 2020s?

The BHP Group Ltd (ASX:BHP) share price could be defined by coal in the 2020s if things keep escalating at the current pace.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The BHP Group Ltd (ASX: BHP) share price has performed strongly over the past four years, up 114%. Plus all the dividends.

But these days any business that is producing and exporting coal seems to be coming under a lot of public attention.

Coal is not BHP's biggest division by a long shot, it's iron ore that generates the king's share of earnings for BHP. But coal generated US$3.4 billion of underlying earnings before interest and tax (EBIT) in FY19, which was more than copper and petroleum, although copper may reclaim its second place position in FY20.

The reason why coal could be so influential for BHP's 2020s share price is due to climate change concerns.

Global demand for coal could fall from customers, and investors – which decide the share price – may exclude buying BHP shares because of coal for ESG reasons. Imagine if BHP divested its coal division, there could be a large increase of aggregate demand for BHP shares from investors which would boost the share price.

But if I were BHP management I wouldn't sell the coal division today, I'd want to get a good price for the coal business. Demand from Asia for coal from countries like India is expected to rise considerably over the next 10 years as energy demand rises, which should at least support the coal price.

But compared to most other coal companies, BHP is taking more environmental action.

The company has said that it accepts its responsibility to take action on global warming and reduce its greenhouse gas emissions. One of the things it's doing is to do new climate portfolio analysis in 2020 to outline plans to mitigate and adapt to global warming.

It has launched a five-year, US$400 million climate investment program to assist delivery of its public targets for its own operational emissions (scope 1 and 2) and to work with others across its supply chain to address scope 3 emissions that come from the transport, processing and use of its products.

The scope 3 goals will be presented in 2020 and will be designed to measure BHP's impact and align with the goals of the Paris Agreement. BHP can't force customers to reduce emissions, but it can work with them to reduce emissions, such as developing carbon capture utilisation and storage in industrial applications such as steel.

Foolish takeaway

BHP is currently trading at 15x FY21's estimated earnings. Iron ore is currently at a strong point in the cycle, so I wouldn't want to buy shares right now – cycles normally change.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

More on ⏸️ ASX Shares

a woman wearing a close-sitting hat featuring wires and thick computer screen glasses clutches her computer monitor and looks shocked and disturbed as she reads old-fashioned computer text from the screen.
Technology Shares

Here's why ASX 200 tech shares (ASX:XTX) outperformed today

ASX tech shares have taken a turn for the better today.

Read more »

Worker in hard hat looks puzzled with one hand on chin
Resources Shares

Why did the Rio Tinto share price (ASX:RIO) have such a lousy 2021?

We look at what happened to this ASX 200 mining giant's shares last year

Read more »

a miner wearing a hard hat smiles as he stands in front of heavy earth moving equipment on a barren mine site.
Share Gainers

Here's why the Rumble Resources (ASX:RTR) share price is climbing 5%

The mineral explorer's share price is on the rise amid promising drill results.

Read more »

share price high, all time record, record share price, highest, price rise, increase, up,
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Wednesday

Here are your top 10 biggest gainers in the ASX 200 on Wednesday.

Read more »

comical investor reading documents and surrounded by calculators
⏸️ ASX Shares

The ASX reporting wrap-up: WiseTech, Bravura, Seven Group

Just what the investor ordered. Here’s a recap of the companies that reported on Wednesday...

Read more »

Doctor performing an ultrasound on pregnant woman
⏸️ ASX Shares

The ASX reporting wrap-up: Ansell, Kogan, Nanosonics

Just what the investor ordered. Here’s a recap of the companies that reported on Tuesday...

Read more »

blue arrows representing a rising share price ASX 200
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Tuesday

Here are your top 10 biggest gainers in the ASX 200 on Tuesday.

Read more »

unhappy investor considering computer screen
Share Market News

The ASX reporting wrap-up: Charter Hall, Ampol, NIB Holdings

Just what the investor ordered. Here’s a recap of the companies that reported on Monday...

Read more »