The ASX mining stock BHP Group Ltd (ASX: BHP) is suffering through a sell-off. It's down 11% from 30 September and down close to 20% in 2024 to date. That's painful, considering the S&P/ASX 200 Index (ASX: XJO is up more than 10% this year.
I think it's quite clear why the ASX iron ore share is down so much – the iron ore price has dropped considerably in 2024.
The iron price has fallen from above US$140 per tonne to approximately US$100 per tonne today. The commodity price has declined by close to 30% since the start of the year.
Why does the commodity price matter so much?
BHP is one of the world's largest price-taking businesses. It has to sell its commodity at the price it's trading at in global markets. And that is heavily affected by supply and demand issues.
In other words, the ASX mining share's profits are influenced by what's happening with prices.
The cost of mining doesn't usually change much from month to month. Mining 100mt of iron ore takes the same people, equipment, vehicles, port infrastructure, and so on, whether the iron ore price is US$100 or US$140 per tonne.
This means that an increase in the iron ore price and the extra revenue that comes with it will largely add to the net profit line.
However, the same is true when the commodity price falls. The drop in revenue largely reduces net profit, too, because the costs don't change.
Thankfully, BHP's commodity portfolio isn't entirely focused on iron ore. It does have diversity with the commodities copper, coal and potash.
Is now the right time to invest in BHP stock?
The ASX mining share has several scale advantages over its smaller peers. It can continue generating profit at a lower iron ore price than competitors.
I'd also like to point out that BHP stock has a history of being cyclical in line with the iron ore price as Chinese demand weakens and strengthens over a cycle.
Typically, it has been a good strategy to invest when the iron ore price has been weak and wait for a recovery until Chinese demand returns. Of course, there's no rule that says Chinese iron ore demand will recover in any particular length of time.
The prospect of the US imposing large tariffs on China under incoming US president Donald Trump could be a significant headwind for the Chinese economy.
However, for now, there is promising news coming out of China. According to Trading Economics, data released recently revealed that China's steel output increased by 9.5% year over year for the last few weeks. Iron is a key ingredient in the production of steel.
The growth of steel production outweighed concerns about the 4.3% year-over-year decline in industrial profits for October. This was worse than the 3.5% drop in September.
Trading Economics suggests that some investors hope China will introduce additional stimulus measures to mitigate US tariffs and support economic growth.
According to the forecasts on Commsec, the BHP stock price is valued at 10x FY25's estimated earnings. It has a projected grossed-up (including franking credits) dividend yield of 6.1%.
This looks like a fairly appealing time to invest in BHP shares, though I prefer Rio Tinto Ltd (ASX: RIO) shares for its own commodity mix. It wouldn't surprise me if the iron ore price declined to under US$100 per tonne in the next year or two amid pessimism regarding Chinese demand and US tariff pressure.
