Why is the BHP share price continuing to slide?

Posted: 20 September 2021 1:19 pm
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Shares in mining giant BHP have slid 12% in the last 6 months.

Shares in the world’s biggest miner BHP (ASX: BHP) are among the top losers on the ASX boards on Monday. The stock was already down nearly 5% to $37.27 at the time of writing, and the latest drop comes on top of a 5.4% decline in its value last week.

What is weighing down the BHP stock price?

Investor sentiment in mining stocks on the ASX has taken a hit in the last few weeks, largely on account of the iron ore price. As the largest representative of the sector, BHP has borne its share of the impact of bad news.

Like its top mining peers, BHP posted record annual profit and shareholder payout last month, on the back of iron ore prices staying above US$200 a tonne for several months this year. It even hit an all time peak of $54.55 a share in early August.

But that dream run looks to have come to an end, leaving investors worried about the speed of the slide in prices for the key steel making ingredient.

Iron ore prices have plummeted more than 50% in just the last few weeks, as its biggest market, China, focuses on lowering carbon emissions by curbing manufacturing of steel, prompting a sharp fall in demand.

Last week, data showed China produced just 83.24 million tonnes of crude steel in August, a 13.2% drop from a year ago, and the lowest monthly output since March 2020.

Downward spiral

The spot price for iron ore slumped by another 5.4% on Friday to US$100.80 a tonne. Meanwhile, Singapore iron ore futures are down 3.1% to US$98.55 a tonne early on Monday, the first time they have dropped below the US$100 level this year.

Analysts had expected the decline to be much more gradual. Even Australian government estimates had indicated that iron ore prices would stay above US$100 a tonne until late-2022.

But the rapid drop will no doubt be reflected in the bottom line and dividend payouts of the big miners. It will also lead to analysts revising their earnings estimates downwards, which could in turn fuel further decline in the share prices.

Already, analysts at UBS have downgraded their earnings estimates for iron ore producers on the expectation that the iron ore market will swing into surplus in the second half of 2021, resulting in prices falling below US$100 a tonne over the next few months.

They also cut their price target on BHP shares by nearly 10% to $38 a share, but kept the "Neutral" rating on the stock.

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