The BHP Group Ltd (ASX: BHP) share price has been making strong gains over the last few months. It's up more than 30% since the end of October.
Considering the huge size of BHP, this is a big gain in a short amount of time. BHP now has a market capitalisation of $249 billion according to the ASX.
The key cause of the improvement appears to be the strengthening outlook for commodities with China exiting COVID-19 lockdowns and returning to normal economic activity in the country.
The Asian superpower buys enormous amounts of resources like iron and copper, so a normalisation of activity in the country is helpful for BHP.
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Is the BHP share price an opportunity?
The key question is whether iron ore prices will drop back down, or whether they will stabilise at this level (or even rise).
Commodity prices are notoriously difficult to predict. I'd suggest that's why the BHP share price movements have been so significant over the last year.
The investment group Liberum Capital has indicated that the iron ore price rally may not be as strong as it appears, according to reporting by the Australian Financial Review:
The sharp market bounce in January would suggest that a strong fundamental lift is coming. [The] problem is, China's steel mills haven't seen it yet.
Domestic demand has slightly improved, typical for this time of year, but inventories are rising at their fastest rate since February 2020. Possible timing issue for the restocking indicator, given the earlier Chinese New Year, but the signals move from hold to sell anyway. So, we tell investors to be cautious chasing this rally.
Iron ore port stockpiles at 133 million tonnes are very close to the five-year historical average, and we do not expect any significant build or draw this year. There was some market speculation that the port draw following Chinese New Year was a bullish indicator, but we do not read it as such, in that mills maintain stockpiles to meet future needs and, if anything, the mild draw is a negative.
Rating on the business
Liberum Capital is currently bearish on BHP and Rio Tinto Ltd (ASX: RIO).
Looking at the analyst calls that Commsec covers, there are five sell ratings, 13 holds and nine buys. The experts are split at the moment.
I think the 2023 calendar year could be a good period of earnings for BHP, with an improving situation in China. However, I believe it's better to buy commodity businesses when the commodity outlook is weak, not strengthening.
If I were already a shareholder, I'd be happy to keep holding shares and benefit from likely good dividends. But, I'd wait for a noticeably lower BHP share price before buying, even if that took at least six months.
