BofA Merrill Lynch downgrades BHP to ‘neutral’

The bank said China growth is disappointing. It noted that China steel production cuts have pushed iron ore into surplus and downgraded its iron ore forecast for 2022 by 45% to $91/t. It also cut its copper price forecast by 21% to $9875/t.

The bank explained that China's policy to "force" steel production down 10% during the August-December period puts the iron ore market into surplus.

"Barring a change in this policy stance, we don't see any reason why iron ore shouldn't trade down to marginal cost (c. $80/t), particularly as ‘blue sky’ policies loom in early 2022 for China's winter Olympics," it said.

"While we are concerned on the sustainability of China's approach to steel in terms of the wider impact on growth and economic stability, we can't argue with the facts as they stand and downgrade recommendations on several iron ore producers, including BHP."

To be clear, the bank said it doesn’t see BHP shares as expensive.

"Indeed EV/EBITDA of circa 4x, free cash flow yield of c15% feels like compelling value.

"Still, with our China economist highlighting potential for a ‘bumpy’ Q4 and downside risk to her GDP estimates, and the steel policies discussed above we think the street will be adjusting earnings expectations down for at least a few months."

The bank said a "visually" inexpensive stock with earnings downgrades can be a value trap, at least until the downgrades stop.