Falling from record highs, why the BHP (ASX:BHP) share price couldn’t keep it together in May

From hero to zero, the BHP share price suddenly pulled back from record highs.

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The BHP Group Ltd (ASX: BHP) share price hit a new record all-time high of $51.82 on 10 May.

But instead of it being smooth sailing at record highs, its shares experienced a sharp 10.60% pullback to a low of $46.34 by 26 May. By the end of the month, its shares had delivered an unfortunate flat month-on-month gain.

Why was May such a bipolar month for the BHP share price?

May seemed like a tug-of-war between record high iron ore prices and China’s policies against “unreasonable” commodity prices.

Looking back, it might have felt like iron ore prices had topped in April. Factors such China’s infrastructure stimulus easing and an anticipated improvement in Brazil’s iron ore output could see the supply demand pendulum shift closer to equilibrium.

But against all odds, iron ore staged yet another rally to break above US$200/tonne for the first time on record. This unexpected move up was arguably the catalyst behind the BHP share price hitting new all-time record high.

But just as things started to get even more euphoric for BHP shares, China issued a number of statements including plans to increase domestic iron ore production, strength its domestic management of commodities and summoned major producers, urging them to safeguard price stability.

While iron ore spot prices have remained above US$200, Chinese iron ore futures contracts on the Dalian Commodity Exchange fell from as high as 1,300 yuan (US$204) to lows of 1,000 yuan (~US$156). Prices have since rebounded to 1,100 yuan (~US$172) levels.

Despite spot prices standing firm above US$200 per tonne, the dive in Chinese iron ore futures contracts could be a reason why BHP shares retreated so quickly from record highs. It might be worth keeping an eye out for any continued divergence in Chinese iron ore futures prices, and if any weakness spills over into spot markets.

With that said, the BHP share price is still 11.10% higher year-to-date, alongside a generous 5.80% dividend yield.

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Motley Fool contributor Kerry Sun 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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