Deutsche Bank downgrades BHP on challenging outlook

The bank noted that after outperforming in 2018 on the back of the successful sale of the US onshore business and improved operational performance in the second half, the major re-rating catalysts are behind us.

DB pointed to weakening earnings and cash flows. It said near-term earnings are supported by robust iron ore and coking coal prices, masking a sharp fall in oil and muted copper prices. It expects steel raw material prices to fade through 2019 as China steel demand decelerates from more than 5% in 2018 to 1-2% this year.

In addition, it noted lagging growth and upside risk to medium term capex. "As sector earnings and cash flows fade in 2019/20 we expect investors to increasingly focus on growth and capital allocation in the years ahead. BHP screens poorly on growth over the next 3-5 years and we expect FY21+ capex to lift above the company's current ceiling of $8bn per annum for FY19/20."

Finally, Deutsche said that while the stock's valuation is not expensive in historical terms, BHP has re-rated versus peers.

"The company is in the process of returning $10.4bn to shareholders but post this return we see stronger cash flow and cash return stories at Rio and Glencore," it said.

At 1250 GMT, the shares were up 0.8% to 1,693.60p.