The BHP Group Ltd (ASX: BHP) share price is recovering from its recent sell-off along with its peers. But a warning of an oversupply of the commodity could keep shareholders on edge.
This wasn't the news investors wanted to hear as the BHP share price bounced 0.7% to $39.22 on Friday.
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BHP share price holding up a little better than peers
The Big Australian is leading the recovery as the Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG) share price gained 0.3% and 0.6% respectively.
The three largest ASX iron ore miners finished the day off their intraday highs.
That could indicate a lack of confidence that the worst is over for the sector, with the BHP share price shedding 15% of its value over the past month. At least that's a bit better than the 19% drop in the Fortescue share price and 17% decline in the Rio Tinto share price over the period.
Supply of iron ore will exceed demand in 2H 2022
What could also be dampening sentiment is a prediction by Morgan Stanley.
The broker looked at how the market behaved in the past two years, where a surplus of iron ore emerges in the second half of the year.
It believes history will repeat this year and said:
We see this dynamic playing out for the third year in a row, at a comparable if not larger scale as in 2021.
Similar to last year, we expect China's already in excess steel production to decline, while iron ore supply appears once again on track for a much stronger 2H vs 1H.
Warning signs for iron ore market
There are early warning signs that the broker's prediction will come through.
Inventory of the steel-making ingredient was building at China's ports last week. This is the first time since mid-February that inventory is increasing.
It's also worth noting that Chinese steel demand slows during the summer months, which makes the iron ore price particularly vulnerable.
Morgan Stanley noted that the risks to iron ore missing its second half base case target of US$130 a tonne is increasing.
Silver lining for the BHP share price
But it isn't all bad news. While near-term risks remain, the broker believes that most of this bad news is already factored into the market. That's the silver lining from the correction in the BHP share price and other ASX mining shares.
What's more, we could see support for the iron ore price come as early as autumn. That's when Morgan Stanley expects to see the profit margins of Chinese steel companies recover.
Ironically, the high inflationary pressure that's driving up production costs may actually be good news for the BHP share price and that of the other big ASX miners.
This is because commodities often find a floor around the marginal cost of production. Higher costs hurt smaller miners more as the big boys have economies of scale.
Let's hope these positives are enough to calm frayed nerves in this volatile market.
