Here’s Where BHP is Going Next…

BHP Billiton [ASX:BHP] is the world’s largest diversified miner and the world’s third largest iron ore producer. It trades on the ASX for $36.20 and has a market capitalisation of $116 billion.

Thanks to its iron ore division, the company’s biggest earner, BHP announced that its first half profit increased by 31% this year.

To be honest, I’m surprised that the share price has held up so well, considering the recent iron ore price action. In a matter of weeks, the iron ore price has dropped from a high of US$110 to around US$94.30 per tonne today.

Nonetheless, I don’t see the iron ore price heading significantly lower from here — fundamentally this should help BHP’s share price.

Here’s why: As I mentioned in Diggers and Drillers this week, the current iron ore price level is at a breaking point for unprofitable domestic Chinese iron ore miners and steel manufacturers.

The Chinese authorities have stated that they will no longer support unprofitable miners and steel makers. That means defaults are likely to occur soon.

I’ve openly stated that, contrary to popular opinion, defaults are good for the Chinese economy and its growth story. Also, defaults mean less completion for Australian iron ore producers and less risk of an over supplied steel industry.

You would think that this should send the iron ore price even lower, which it may well do. However, lower iron ore prices aren’t only hurting unprofitable companies, the entire Chinese industry and economy is feeling the pain.

Make no mistake, the Chinese authorities are watching this story very close. They won’t let the entire industry fall flat on its face.

As such, considering the steep price decline and the Chinese fundamentals, I expect iron ore prices to stabilise in the coming weeks.

But what does this mean for the BHP share price?

Let’s take a look at the technical picture. The chart below tracks the BHP Billiton share price. Each bar represents one week.

First, let’s focus on the red box. It shows the majority of BHP’s price action since August last year. The bottom line shows that the share price has gone sideways for nearly a year — it’s been trading in a range between roughly $35.50 to around $38.00.

Read the rest of this article at Money Morning