Why did BHP shares just hit a 6-month low?

The iron ore price has tumbled from $110.50 one week ago to $99.50 overnight.

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Key points

  • BHP shares have fallen to a six-month low, down 1.56% to $42.15 per share on Thursday afternoon
  • The iron ore price has continued to fall and went below the US$100 per tonne mark last night 
  • Goldman Sachs is backing BHP shares for growth and has a 12-month share price target of $49.90 on the mining stock 

BHP Group Ltd (ASX: BHP) shares are down 1.56% to $42.15 per share on Thursday afternoon, marking a six-month low.

Other ASX iron ore shares are also down today.

Fortescue Metals Group Ltd (ASX: FMG) shares are down 3%, Rio Tinto Ltd (ASX: RIO) shares are down 1.7%, and Mineral Resources Ltd (ASX: MIN) shares are down 2.9%.

So, what's causing the drop?

Tumbling iron ore price takes BHP shares with it

Undoubtedly, the iron ore price falling below US$100 per tonne is a factor in the performance of BHP shares today.

Iron ore closed last night's trading session at US$99.50 per tonne, down 3.4%.

According to Trading Economics analysis, prices for 63.5% iron ore cargoes for delivery in Tianjin have fallen from a near one-month peak of $110.50 just a week ago on May 18.

The price drop is due to reduced steel production in China and fewer supply disruptions.

According to Trading Economics:

As concerns about the outlook of China's property sector persist, the price of iron ore is expected to further weaken in the upcoming months, potentially reaching around $95 per tonne.

Despite the introduction of various support measures by Beijing, these initiatives have not yet translated into noticeable increases in investment or construction activity.

The most recent economic data revealed that crude steel output from China fell 1.5% to 92.6 million tonnes in April.

Additionally, the country's housing prices fell 0.2% year-on-year, continuing the downward trend for the 12th consecutive month, and property investment declined 16.2%, representing the largest drop since November 2022.

What's next for the iron ore price?

The fall in the iron ore price is in line with federal government projections for FY23.

As we recently reported, the Department of Industry and Resources recently released a five-year outlook for a range of commodities based on current global trends and demand.

Here are the forecasts for the iron ore price:

Iron ore prices (62% Fe)

  • FY22: US$119 per tonne
  • FY23: US$97 per tonne
  • FY28: US$69 per tonne

However, BHP is a diversified miner that also produces coal, copper, nickel, and potash, too.

Production diversification is protective for shareholders when commodity prices fluctuate.

For example, the team at brokerage Wilsons think the copper price could explode, and BHP shares are the best way to leverage that trend.

Broker backs BHP shares for growth

BHP's wide portfolio of metals and minerals production is one of the reasons Goldman Sachs is backing the ASX 200 mining share for growth.

Goldman has a buy rating and a $49.90 price target on BHP shares.

As my Fool colleague James reports, this implies a potential upside of about 17% over the next year, alongside an approximate 6% fully franked dividend yield.

Goldman says:

Our Buy thesis on BHP is based on: (1) Attractive valuation, but at a premium to S32 & RIO (2) GS bullish iron ore, copper and met coal, (3) Optionality with +US$20bn copper pipeline and improved production growth, (4) Robust FCF, but still below RIO & S32.

Motley Fool contributor Bronwyn Allen has positions in BHP Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

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