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Morgans upgrades BHP to Add: Key drivers supply tightness/price increases

Fri 25 Mar 22, 2:07pm (AEST)
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Key Points

  • BHP remains Morgans top sector pick due to superior diversification and ability to mitigate cost and labour pressures
  • Growth in China and internationally are the main focus of BHP's outlook
  • Key commodities: Iron ore/oil prices are forecast to remain strong over 2022

While BHP’s (ASX: BHP) share price has seesawed since the beginning of the year on the back of wild commodity volatility, Morgans can see sufficient reason to upgrade its recommendation on the big miner to Add from Hold, and has increased the target price to $51.80 from $48.70.

Despite an expectant slowdown in iron ore price growth, Morgans believes supply tightness will continue sustain strong earnings within the sector.

The broker doubts that surging fuel costs and labour and supply constraints will have a material impact on pricing, and assuming the market remains strong – on the back of supply tightness – foresees benchmark pricing of US$140-150 per tonne. 

Given BHP’s superior diversification and ability to mitigate cost and labour pressures, the big miner remains Morgans' top sector pick.

The broker also reminds investors that growth in China and internationally are the main focus of the company's outlook. 

Commodity prices to go higher

While BHP shares have struggled to stay above the $50 mark, the stock nudged higher this week, for what at face value was no specific reason.

However, the key driver is most likely to be the outlook for commodities across the board, especially iron ore and oil in which BHP has significant operations.

For example, Morgan Stanley has its iron ore price forecast 9% higher to $US155 a tonne, while Goldman Sachs has upgraded Brent crude to average $US135 a barrel, a sharp increase from its previous forecast of $US98 a barrel.

Morgan Stanley upgrades for 2022 across a broader range of commodities include:

  • Thermal coal 96%.

  • Copper 9%.

  • Hard coking coal and thermal coal prices by 70% and 96% respectively.

  • Lithium carbonate price 225%.

  • Nickel price 19%

  • zinc price 48%

Disruptions to continue

Meantime, while none of the iron ore majors have adjusted guidance as yet, UBS is closely monitoring shipping data to gain an appreciation as to how the iron ore producers are currently faring.

The broker isn’t convinced that the worst of the covid-related absenteeism that have plagued Western Australian mining activity – notably in iron ore, lithium, nickel, alumina and gold – are finally behind the sector.

As a result, UBS maintains its Neutral rating on BHP and retains a $42 target price.

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BHP share price movement over six months.

 

What other brokers think

Based on the seven brokers that cover BHP (as reported on by FN Arena) the stock is currently trading with -0.7% downside to the target price of $49.36.

Macquarie expects BHP’s near-term earnings are receiving a boost from higher coking coal and iron ore prices, and retains an Outperform rating, with the target price rising to $61 from $60.

On the back of the Russia/Ukraine war, Citi has raised its long-term assumed benchmark iron ore price to US70/t from US60/t. The broker retains a Neutral rating and $48 target price.

Consensus on BHP is Hold.

Based on Morningstar’s fair value of $45.77, the stock appears to be overvalued.

 

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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