What happened
Shares in resources company BHP Group Limited (BHP -1.90%) rose 10.9% in March, according to data provided by S&P Global Market Intelligence. I've defined BHP as a "resource" company to reflect its overall exposure to energy and a broad range of mining commodities. Therefore, when the prices of critical commodities/materials increase, the value of BHP's assets (iron ore, oil and gas, copper, metallurgical coal, nickel, and potash) will increase also, and so will BHP's share price.
BHP is merging its oil and gas business with Woodside Petroleum, but BHP shareholders will receive shares in the company created out of the merger. Hence, it's fair to say BHP's share price still has significant exposure to movements in the price of oil. The reason is that before the merger takes place, potential BHP investors will be entitled to a part of the new oil-and-gas-focused company. Otherwise, the key to BHP's prospects lie in iron ore, copper, and metallurgical coal.
Steel demand is pivotal to BHP's prospects. Image source: Getty Images.
BHP's near-term prospects have received a boost due to the war in Ukraine and its impact on coal, iron ore, and steel product exports from Russia and Ukraine. As a result, there's been a strong move upward in these commodities, as well as oil and gas, since the war started.
So what
The impact of the war is likely to be here for an extended period if sanctions persist and there's lasting damage to Ukraine's steelmaking facilities in Mariupol. Moreover, the shift in steel production also changes demand patterns for iron ore and coal, and even copper, as Ukraine is a major exporter of copper wiring used in the automotive industry, for example.
That said, BHP still operates in highly cyclical end markets. As a result, there's a possibility that a combination of rising interest rates and demand destruction due to high commodity prices could lead to a price correction in commodities in time. In addition, a slowdown in the Chinese property market would hurt steel demand. Therefore, investors shouldn't get too complacent in assuming BHP's core commodity/materials prices will rise inexorably.
Now what
In a sense, BHP needs the economy to walk the tight line between maintaining growth and, therefore, demand for steel, copper, and energy, while being able to absorb high commodity prices at the same time. Of course, there's no guarantee it will happen, but if so, BHP stands well placed to benefit from a commodity super-cycle.
