Three Commodity Cycles Point to the Same Reality at BHP

In the 2003-2008 cycle, BHP tripled. The catalyst was iron ore pricing and volume expansion, but the move that surprised was the coking coal business. Management did not emphasise it in the early communications. The earnings power was a quiet surprise for two years before the sell-side caught up.

In the 2016-2018 cycle, BHP doubled. The hidden asset was petroleum, which was subsequently spun off. But during the rally, the petroleum cash flow was what funded the buyback programme that accelerated the re-rating.

In the 2020-2022 cycle, BHP rose 80%. Iron ore carried the narrative. Copper was the quiet driver that started to show through in the final six months of the rally and set up the post-rally consolidation.

The current cycle has the same structural set-up. Iron ore is the headline. Copper is the quiet compounder. Capital returns are running ahead of guidance. Historically, across three complete cycles, the pattern has played out the same way every time.

The China cargo curb relaxation flagged this week is the single piece of news that reframes the 2026 iron ore outlook. If the Chinese steel mills are back to normal import velocity by the second quarter, the iron ore price should hold in the $95 to $110 range for the balance of the year. That is above the $85 level that many sell-side models use as the base case.

The copper pivot is the more important long-term story. Escondida is running at capacity utilisation above 90%. Spence is expanding. The Oak Dam discovery in South Australia is progressing through feasibility. Combined, BHP's copper production will exceed 2.1 million tonnes in 2026, making it the single largest copper producer in the world by unit volume.

Historically, copper miners have re-rated 18 to 24 months before the supply deficit becomes consensus. Freeport in 2020 is the textbook case. The supply deficit for copper looks likely to begin in earnest around 2027. The re-rating window for BHP copper exposure is now.

Across the three cycles we have tracked, BHP's capital allocation has been among the most disciplined in the global mining sector. The payout ratio has been tightly managed. Major acquisitions have been relatively few and generally value-accretive. The OZ Minerals acquisition in 2023 was priced fairly and has performed ahead of plan.

The Anglo American pursuit last year failed, and that failure turned out to be a positive for BHP shareholders. Anglo has not traded the way it would have if BHP had completed the deal at the terms proposed. The discipline in walking away, when walking away was the harder choice, is the same discipline we have seen BHP demonstrate in every prior cycle peak.

Management returned $15 billion to shareholders in the last fiscal year through dividends, a 65% payout ratio on underlying earnings. The pattern is consistent with the prior cycles and positions BHP to continue compounding cash returns through the next 18 months.

Rio Tinto is up 72% in the same period, according to the recent analyst notes. The Rio copper exposure is growing but still smaller than BHP's. The iron ore exposure is roughly comparable. The capital allocation track record over the past five years is slightly less consistent than BHP's, which is why the multiple gap has historically favoured BHP.

Vale has been the cheapest iron ore major for most of the last decade and the cheapness has been deserved. Governance, operational execution, and the ongoing aftermath of the tailings dam incidents have kept the multiple compressed. Vale is a trade, BHP is a holding.

Freeport is the closest pure copper comp. Freeport is the better name if copper is the only thesis. BHP is the better name if copper plus a steady iron ore base is the thesis.