China has allegedly told its steel mills to stop buying iron ore from BHP (ASX: BHP) as part of contract negotiations. China Mineral Resources Group, formed in 2022 to negotiate with iron ore miners on behalf of mills, is trying to force BHP to agree to long-term contracts at discounted prices.

Why it matters: It doesn’t matter, at least not in the short to medium term. Given its huge appetite for imported iron ore, the supply of which is dominated by BHP, Rio, Vale, and Fortescue, China doesn’t have the negotiating power to force any of these companies to accept lower prices.

  • While scrap is used to create steel via the electric arc furnace method, China’s steelmaking capacity is primarily blast furnaces/blast oxygen furnaces, which require iron ore to produce steel.

The bottom line: Our $40 fair value estimate for no-moat BHP stands, with shares trading moderately above fair value.

Big picture: We prefer not to comment on every rumor or short-term issue and remind investors to focus on the bigger picture. China’s demand represented about 70%, or 1.2 billion metric tons, of the total seaborne iron ore trade of around 1.7 billion metric tons in 2024.

  • Supply from no-moat Rio (about 350 million metric tons on a 100% basis), Vale (310 million), BHP (295 million), and Fortescue (195 million) in 2024 equates to around 70% of that seaborne demand. China has nowhere else to go to meet its iron ore needs.

Long view: Though its negotiating power will likely improve longer term as supply rises and demand falls.

  • We forecast seaborne supply rising about 25% by 2029, from 2024. Once at full capacity, likely in fiscal 2028 or 2029, Simandou will add 120 million metric tons. Vale and, to a lesser extent, BHP, Rio, and Fortescue also intend to increase volumes.
  • Along with China’s steel production likely having peaked, and as its scrap use rises, this drives our view that iron ore will fall to about USD 72 per metric ton midcycle from 2029, from USD 105 now.

Market strategy and outlook

BHP is the world’s largest miner by market capitalization. Its main operations span iron ore and copper, with smaller contributions from metallurgical coal, thermal coal, and nickel. The company is also developing its Jansen potash project in Canada. BHP merged its oil and gas assets with Woodside Energy in June 2022, vesting the Woodside shares it received to BHP shareholders, and exiting the sector. It purchased copper miner Oz Minerals in fiscal 2023.

Commodity demand is tied to global economic growth, China’s in particular. BHP benefited greatly from the China boom over the past two decades. China is BHP’s largest customer, accounting for roughly 60% of sales in fiscal 2025. With demand for many commodities likely to soften as the China boom ends, particularly iron ore which has disproportionately benefited from the boom in infrastructure and real estate investment, we think the outlook is for earnings to decline.

Its generally low-cost, high-quality assets mean BHP is likely to be one of the few miners that remains profitable through the commodity cycle. Much of the company’s operations are located close to key Asian markets, particularly the low-cost iron ore business, providing a modest freight cost advantage relative to some producers such as those in Africa and South America.

BHP correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification. Much of its revenue comes from assets in the relative safe haven of Australia. The development of Jansen in Canada is BHP’s major expansion project, with the company also pursuing modest expansion of its Western Australia Iron Ore operations above 290 million metric tons (100% basis) per year.

The good times during the height of the China boom saw significant capital expenditure, notably on iron ore and onshore US shale gas and oil. Overinvestment in the boom diluted returns to the point where we struggle to justify a moat. As a commodity producer, BHP lacks pricing power and is a price taker.

Bulls say

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces.
  • BHP’s Jansen potash project gives it additional diversification, with potash being less correlated to the other commodities it produces.
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Bears say

  • BHP has shown improved capital allocation since its missteps during the China boom, but continuing high commodity prices could encourage it to once again aggressively expand output.
  • With its earnings dominated by iron ore and copper, structurally lower demand from China could lead to significantly lower earnings.
  • Resource companies could face growing sovereign risk as governments under fiscal pressure look to plug budgetary holes by taxing the industry.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.