Weaker than expected iron ore earnings at BHP could be the catalyst for a strategic shift says Morningstar equity analyst Jon Mills. He believes the miner may potentially pivot away from returning capital to shareholders and towards increasing production of ‘future facing commodities’ such as copper and nickel.

On Tuesday BHP (ASX: BHP) announced that profits had jumped 173%, gaining US $7.1 billion over the last fiscal year.

Iron ore revenue fell 12.1% from last year to US$ 30.8 billion. While copper revenue increased 6.7% and coal revenue jumped 66.9%.

In BHP’s results it was noted that higher average realised prices for metallurgical coal, thermal coal, copper, and nickel offset the lower average realised prices of iron ore during the year.

The miner’s thesis was echoed by Mills as he explained that “high metallurgical coal and copper prices have helped compensate for lower average iron ore prices and higher costs.”

Coal prices shot up over 50% to US$ 376.30 per tonne in July after prices began to climb at the start of 2022. Copper prices remained elevated for the first half of this year, peaking at US$ 10,729.85 per tonne, cooling to US$ 7,974.85 in August. Nickel prices also jumped this year reaching highs of US$ 48,241 per tonne. The elevated prices of these commodities shine a bright light on weak iron ore prices which only managed to reach a high of $US 161.84 per tonne in April, a fraction of last year’s July peak of US$ 219.77.

Mills believes the dip in iron ore prices resulting from weak Chinese demand has the miner reconsidering their strategy. He believes the company will pivot towards producing “future facing commodities” amid a growing demand for global energy transition and the popularisation of electric vehicles.

“[BHP] is emphasising “future facing commodities” such as copper and nickel, which are more likely to benefit from reducing carbon emissions,” he said.

“We think the motivation is the likely earnings decline from iron ore as investment activity in China likely slows, and with it demand for iron ore prices,” he added.

Chinese economic growth has taken a battering this year because of the country’s strict zero covid policy, keeping residents in their homes and shutting down businesses. The government has brought forward fiscal stimulus by selling special bonds and establishing an infrastructure investment fund of 500 billion yuan ($104.86 billion) to stimulate the economy. However, Chinese retail sales and industrial production have again missed expectation in July by 2.3% and 0.8% respectively all while real estate investment fell. The weakness of the Chinese economy is a concern for BHP as a majority of their revenue comes from China.

“BHP remains highly dependent on Chinese demand for iron ore and copper. China represents around two-thirds of demand for these commodities respectively,” says Mills.
The iron ore miner is confident that Chinese demand for steel making inputs will increase yet remain cautious about how soon this may become a reality.

“While a steady improvement in end-use demand from China is anticipated, the slower than expected rebound in construction post COVID-19 lockdowns has dampened sentiment across the steel value chain,” says BHP.

With iron ore prices heavily reliant on volatile Chinese demand, Mills sees the logic in BHP’s attempt to increase copper and nickel production.