BHP Group Ltd (ASX: BHP) shares have faced plenty of volatility over the past few years. In the last 12 months, the ASX mining share has risen by 17% (and then add the dividends too!)
After such a solid performance, should investors be bullish or bearish about the business?
As a commodity business, there is usually a very close link between the company's performance and what's happening with resource prices. China is a key buyer of what BHP produces, particularly iron ore, so let's have a look at what's going on there.
Bearish China and iron ore commentary
The investment bank Goldman Sachs thinks the iron ore price is going to fall this year as a result of changes to supply and demand. This comes amid expectations that Chinese steel production will fall, according to reporting by the Australian Financial Review.
In the second half of 2023, Goldman Sachs thinks the iron ore price will average US$90 per tonne — a fall of more than 10% from where it is now.
The iron ore price recently received a boost after China said it would support its property sector, but the market doesn't think anything meaningful has been announced since.
The AFR also reported that Goldman Sachs has pointed to reports of China's National Development and Reform Commission communicating with provincial governments to "enforce steel production cuts". However, it appears only the Yunnan province has reportedly communicated this to producers.
The investment bank has estimated that if those cuts were seen nationally, it would lessen iron ore demand by around 65 million tonnes.
Even without that, Goldman Sachs thinks the iron ore market will see a 68 million tonne surplus in the current half. It's also expecting weaker margins for China's steel exports.
Bullish case for BHP shares and earnings
Goldman Sachs itself rates BHP as a buy (according to Commsec), though the target price is $45.60. This implies only a slight potential rise over the next 12 months.
Commsec has collated a number of opinions on the ASX mining share. Ten analysts think the resource giant is a buy, 12 think it's a hold, and four think it's a buy. Overall, there are more positive than negative opinions right now.
Goldman Sachs has been negative on the iron ore price for some time and it has ended up being stronger than anticipated. The broker's pessimistic iron ore price projection may be right this time, but new Chinese stimulus could change the picture again.
BHP is also one of the larger copper miners, particularly after its acquisition of OZ Minerals. Goldman Sachs is positive on copper because of limited supply growth, and strengthening demand because of decarbonisation efforts. Goldman Sachs wrote (courtesy the AFR):
Given current mine supply is running at a sharply lower growth rate than refined production and the implied concentrate destock in the first half of this year equates to nearly the entire 2022 concentrate surplus, the risks are skewed toward more restrained refined supply ahead.
If evidence for that starts to emerge, that would be a key support for China refined imports as well as copper prices given the limited ex-China copper stocks.
My 2 cents
I don't think there's going to be a big decline of earnings unless the iron ore price tanks, which could mean that the BHP share price remains supported.
But, if I were trying to beat the S&P/ASX 200 Index (ASX: XJO) over the long-term, I'd choose to buy at a point in the commodity cycle when the iron ore price is weak, which I would expect would also be hurting the BHP share price.
If Goldman Sachs is right, and the iron ore price does fall to US$90 per tonne, that might be a more compelling time to consider BHP shares when there's fear in the market.
