Why are BHP shares trudging lower on Friday?

Iron ore is a central talking point for BHP's outlook.

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BHP Group Ltd (ASX: BHP) shares are tracking lower from the open on Friday despite no market-sensitive news from the company.

At the time of writing, shares in the diversified mining giant are fetching $44.49 per share, 0.41% lower from the open.

This continues a more than 11% slide into the red this year to date.

With the company's trailing dividend yield at 5.3% and iron ore prices showing volatility, let's explore the reasons behind this dip in BHP shares and what it might mean for investors.

Citi's caution on iron ore prices

BHP shares faced headwinds in FY24 due to a large retracement in iron ore and copper prices.

In particular, iron ore, BHP's primary breadwinner, fell from US$117 per tonne at the end of May to US$106 per tonne in June, driven by weakness in China's economy and rising inventories.

Having peaked at US$144/tonne on 3 January, it now sells at US$113/tonne at the time of writing. Copper – the company's second-largest revenue earner – is also down from its highs in 2024.

Analysts at Citi have issued a warning that iron ore prices are likely to remain volatile ahead of China's Third Plenum meeting. The firm predicts prices could fall below US$100 per tonne in the coming months, according to The Australian.

The investment bank sees iron ore prices "fading [in] strength…over the summer," maintaining a price target of US$95/tonne.

Despite iron ore futures rallying the past month, analyst Shreyas Madabushi said that onshore steel demand in China remained flat.

China is the world's largest iron ore importer, buying around three-quarters of all global seaborne iron ore.

Madabushi also notes that construction and infrastructure activity is slowing due to inclement weather and the typical summer slowdown. This echos my colleague Tristan's findings that China has shown a decline in industrial and housing demand.

Citi said that China's steel inventories are increasing, while port inventories of iron ore remain high, which could reduce output from steel mills.

Meanwhile, the consensus view at the Iron Ore Forum in Singapore was that Chinese iron ore impacts may have already peaked, according to Reuters.

What's in store for BHP shares?

Despite the recent price decline, BHP remains in favour with the broker crowd.

Analysts at Morgans recently highlighted BHP's ability to generate substantial free cash flow, supporting significant dividend payments. It has a buy rating with a $48.30 price target on BHP shares.

According to my colleague James, it forecasts fully franked dividends of approximately $2.42 per share for FY24 and $2.17 per share for FY25.

This equates to yields of 5.4% and 4.9% at the current share price, respectively.

BHP is also dealing with legal action from the Mining and Energy Union (MEU), which has filed applications with the Fair Work Commission seeking pay rises for 1,700 labour-hire workers at BHP's Peak Downs, Saraji, and Goonyella Riverside coal mines.

We will have to wait and see the outcome of this situation.

Foolish takeaway

While the recent decline in BHP shares might concern some investors, the company's strong dividend yield and robust cash flow generation remain compelling factors.

However, investors should be mindful of the volatility in commodity prices, especially given Citi's views. It's essential to weigh these factors carefully before making any investment decisions. Always seek professional financial advice when able.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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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