Where to next for the BHP share price?

It’s been a bumpy ride for the BHP in 2022, with the share price of Australia’s now largest company resembling more of a rollercoaster than a blue-chip company.

In the last two weeks alone, the BPH share price fell top to bottom 15% – eliminating $50 billion in market capitalisation – before recovering part of the losses in the last three trading days.

The most recent sharp declines are the result of a falling iron price. Last Monday, May iron futures contracts in Singapore fell 9.7%. Nickel and copper prices have also come off.

Commodities have been hit across the board over the past two weeks as China grapples to contain several coronavirus outbreaks. Its internally developed Sinovac vaccine is inferior to its western counterparts, while the country has struggled to convince its vulnerable elderly population to get the jab. As a result, 25 million Shanghai residents have been in lockdown for one month, while Beijing is about to conduct mass testing on its 22 million population. Outside of these two, 20 cities and 30 million more people remain under lockdown.

The onerous restrictions are placing stress on global supply chains as factories shut down and worker absenteeism rises. Truckers cannot get around without quarantining in provinces. Access to ports is also encumbered with some completely shut.

BHP is also suffering its own labour shortages. Absenteeism is again an issue, particularly at the beginning of the year in addition to worker shortages across mine sites. As a result, the company announced last week that production across its four key commodities – Iron Ore, Copper, Nickel and Coal – achieved either stagnant or negative growth.

Subsequently, markets have gotten jittery in anticipation that aggregate demand by the world’s second largest economy and number one producer of steel will slow. The International Monetary Fund has cut its expectation of GDP growth to 4.4%, down from Beijing’s stated goal of 5.5%. Nomura is even more bearish, predicting second-quarter GDP growth of just 1.8%. Also weighing investor sentiment is China’s repeated claim it wants to reduce carbon emissions.

Positively, President Xi Jinping announced during the week an “all-out” effort to boost construction and infrastructure projects. Steel demand remains robust, while port inventories are shrinking as production increases. Interestingly, Xi’s commentary contradicts China’s recent regulatory crackdown on the property sector, which has seen its second largest developer Evergrande effectively go under.

With China seemingly undeterred in reaching its growth targets and determined to show its strict lockdown approach remains the best course of action, commodity prices should be well supported over the near term, from which BHP directly benefits.

The average broker target is $52.26, implying a 9% upside from today’s price. But it’s worth noting that the BHP share price moves largely in tandem with the iron ore price given over 60% of earnings is derived from the division.

BHP has received decent buying support around the $45 mark, bouncing off it five times already in 2022 and failing to fall through it since early January. That level is also below the most bearish analyst price target of $48 per share.

For the time being its likely movements in the BHP share price will continue to be driven by macroeconomic data and China. Investors also need to keep a close eye on sharp moments in the iron ore price, and to a lesser extent copper, coal and nickel. The company will divest its petroleum assets to Woodside next month. Investors will receive an in-specie transfer of shares plus a franked dividend, which should be supportive of the BHP share price.

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Lachlan Buur-Jensen

Lachlan is an experienced journalist writing across The Inside Investor and The Inside Adviser.