At time of writing, the share price of BHP Group Ltd [ASX:BHP] is down 0.23%, trading at $38.38.
You can see the BHP share price has experienced a resurgence since October lows but appears to be running out of momentum:
We look at BHP’s latest half yearly results and their outlook for iron ore prices in 2020. We conclude that they may be overestimating Chinese growth.
BHP’s half yearly results push share price down slightly and BHP’s iron ore price outlook
Based on the small downtick in the BHP share price, it appears the market was looking for bigger numbers than the ones BHP posted today, here are the main points:
- Revenue up 3% to US$22.29 billion
- Profit after tax up 29% to US$4.8 billion
- Net debt up US$2.9 billion to US$12.8 billion
- Second highest ordinary dividend of US 65 cents per share
- Return on Capital Employed (ROCE) of 19%
So from the outside, it looks like a company that is doing well.
Profit and revenue up, net debt a minor concern and a healthy chunk of change returned to investors via a dividend.
The ROCE also indicates that they are using money relatively wisely.
The most interesting part of the BHP results, however, is there outlook for iron ore prices, which you can see is cautious:
‘Global steel production growth moderated in the first half of the 2020 financial year. The growth profile became increasingly reliant on China as the year progressed, with most other regions contracting. Weakness in manufacturing end-use sectors was the main reason for declining output outside China. Steel mill profitability has been challenged against this backdrop, with blast furnaces in particular caught between falling output prices and rising input costs. Global steel production is expected to increase modestly in the 2020 calendar year, with a slowdown in Chinese growth offset by some improvement in other key regions.’
‘The Platts 62% Fe Iron Ore Fines price index has been elevated since the Brumadinho tailings dam tragedy in Brazil first disrupted the market in late January 2019. The lump premium has also been favourable. We expect supply conditions to return to a more normal path on a one to two-year timeframe. Prices are likely to be volatile as that adjustment plays out. High cost production, on a value-in-use adjusted basis, from Australia or Brazil is expected to determine market price in the longer term. Quality differentiation will remain a durable element in iron ore price formation.’
You can see the iron ore price below:
Source: Business Insider
Outlook for steel production may be overstated
Despite BHP saying steel production could increase modestly in 2020, it is entirely conceivable that iron ore prices may retreat over the course of the year.
Despite other countries, like India, playing a role in increasing demand for the commodity, the iron ore game still relies heavily on China.
And with trade deal yet to be finalised, there could be a number of flow-on effects to the Chinese economy.
Not to mention the potential impact of coronavirus fears.
Indeed, the South China Morning Post reveals that some in China are pushing for a postponement of the purchases of US goods amid the outbreak.
It also reports that ‘factories that have reopened are operating well below capacity,’ and that ‘this dent in the manufacturing supply chain could affect China’s ability to purchase US materials and parts.’
All of this does not bode well for BHP’s iron ore segment.
Softening demand as factories slow to a halt is just one scenario — but it seems to be the one playing out now.
You can get our in-depth look at the downside risks to the BHP share price in this free report. It is also a highly relevant read if you own Rio Tinto Ltd [ASX:RIO] or Fortescue Metals Group Ltd [ASX:FMG] shares.
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