The BHP Group Ltd (ASX: BHP) share price slumped 9.5% in March, underperforming both the broader ASX 200 and its S&P/ASX Materials (INDEXASX: XMJ) peers in March.
Why the BHP share price underperformed
Ex-dividend driving underperformance
The BHP share price went ex-dividend on 4th March for a fully franked $1.311 dividend. Shares generally fall on the ex-dividend date to reflect the dividend being paid. This is similar to how shares typically fall after a capital raising. On 4 March, the BHP share price closed $1.58 or 3.10% lower.
By including the dividend investors would have received in March, the BHP share price fell 6.9% compared to the face value 9.5% fall.
China's crackdown on pollution
China, the world's largest greenhouse gas emitter, has made firm commitments to net-zero emissions by 2060. This means China will have to phase out key Australian exports. Which will include resources such as coal and slash the production of carbon-intensive steel, cement, and chemicals.
While the target is decades away, China has taken some baby steps to mitigate the pollution. In particular, in some of its heavy industrial cities. In mid-March, factories in Tangshan were ordered to limit or halt production. This was applied on days when a heavy pollution alert was in place.
Iron ore prices high but for how long?
Despite potential headwinds for iron ore prices over the medium to long term, prices have remained firm at around US$167 per tonne this week. However, the outlook for prices is far less rosy.
In a quarterly review by Australia's Office of the Chief Economist, iron ore prices were forecasted to "remain well above US$100 a tonne until mid-2021 before easing to just over US$75 by the end of 2022".
From an export perspective, it said that "Stronger prices are expected to push Australia's iron ore export values up to a peak of $123 billion in 2020–21. An easing in prices and stronger Australian dollar are subsequently expected to push earnings back to a still-strong $95 billion by 2021–22."
Keep tabs on Brazilian supply
Production constraints in Brazil have supported record iron ore prices. The Office of Chief Economist believes that these factors are likely to persist for at least another six months. However, its commentary puts the spotlight on Brazil's iron ore giant, Vale.
On December 2, Vale released an update to its guidance, which
reduced its expected output for 2020 from 310-330 million tonnes to 300- 305 million tonnes. This will add significantly to supply pressures over the coming year.
China's stimulus could slow
China's infrastructure driven economic recovery is a key catalyst for the rapid purchases of Australian iron ore. The report notes that "any easing in Chinese stimulus measures will also lead to fairly rapid downward shifts in prices from the current forecast level".
What's next for the BHP share price?
ASX iron ore majors are heavily reliant on a buoyant iron ore price. This allows them to maintain market leading dividends and solid share price performances. If the forecasts from the Office of the Chief Economists hold true, then this would see a domino effect in lower iron ore prices. And, possibly, a weaker BHP share price and lower dividends.
