The BHP Group Ltd (ASX: BHP) share price is at risk of ending the year nursing losses with few signs of a letup in the headwinds pressuring the miner.
Falling iron ore prices, the sputtering Chinese economy and rising cost pressures are some of the factors hanging over its shares.
Now that BHP has shed its massive record dividend, I don't blame you if you were thinking of cashing out.
What's the shorter-term outlook for BHP shares
After all, we might be waiting for a while before the next positive share price catalyst. And given the BHP share price has fallen around 10% since January, shareholders might be sitting on losses for 2022.
While this ignores the in-specie distribution of Woodside Energy Group Ltd (ASX: WDS) shares, the outlook for BHP is still looking uncertain.
But I think it would be a mistake to throw in the towel. While I do take profit as I actively manage my portfolio (cash is my single largest position currently), I intend to keep my remaining BHP shares.
Flat means up for ASX iron ore shares
This is despite the iron ore price crashing from its March 2022 peak of around US$160 a tonne to approximately US$100/t.
The fact is the BHP share price is still sitting pretty at the current iron ore spot price. It roughly costs BHP US$20 to dig up and ship a tonne of ore from its Pilbara mines.
At current market prices for its key commodities, Macquarie Group Ltd (ASX: MQG) estimates a 12% and 20% earnings upside for the miner in FY24 and FY25, respectively.
Iron ore can hold its ground
BHP can continue to generate substantial cash flows even if the world goes into a recession – if iron ore holds its ground.
There are reasons to think it could. The problems with China and the global economy from rapidly escalating rate hikes are well understood. The risks are largely priced in.
Secondly, the supply of iron ore is tight even when demand is on the back foot due to production issues at Vale SA (NYSE: VALE) and Rio Tinto Limited (ASX: RIO).
Has iron ore hit a bottom?
The scope of the supply imbalance is reflected in comments by Vale that things can only get better, reported Bloomberg.
The comments came from the Brazilian miner's head of strategy and business transformation, Luciano Siani. He said that the iron ore market has stabilised following the sell-off and commented:
"The good news is that from now on it can only get better…. There is no ore available in the near term.
Holding on to BHP shares
This doesn't mean that the BHP share price will be protected if the S&P/ASX 200 Index (ASX: XJO) tanks.
But I believe the Big Australian can recover more quickly than those in other sectors thanks to the positive fundamentals.
Naturally, all bets are off if commodity prices crash. But that would take something rather unexpected to trigger such a meltdown.
