The BHP Billiton Limited (ASX: BHP) share price could see a huge upswing if commodity prices improve as some analysts expect.
Currently trading at around $20.25, BHP's share price has jumped more than 13% in the past week, thanks to steadying iron ore prices and a better outlook for the commodity.
Iron ore prices fell 2% overnight to US$59.36 a tonne but has been consistently above US$50 a tonne since late February. That comes on the back of a much-improved outlook for steel demand and supply – and also bodes well for the world's largest iron ore miner Rio Tinto Limited (ASX: RIO).
Some analysts are forecasting average prices above US$60 a tonne in 2017 and above US$70 a tonne in 2018, partly driven by a falling US dollar if the US Federal Reserve is forced to stimulate the economy.
Iron ore generates around 34% of BHP's total revenues and 144% of total group earnings before interest and tax (EBIT). That's mainly because coal is generating huge losses for the miner currently.
Petroleum also makes up a substantial portion of BHP's revenues, 24% of total sales, but it too generated an earnings loss in the last half year. If oil prices can stabilise – which they appear to be – apart from some minor hiccups – that will also be good news for the giant miner.
What next for BHP?
BHP is due to report its full-year results next week, and analysts are forecasting a big fall in earnings per share (EPS) compared to the 2015 financial year (FY15). BHP reported US$1.21 in EPS in 2015 – which was down 52% from the prior year – but is expected to report just US$0.20 in EPS this financial year according to Reuters.
However, that is expected to more than double to US$0.46 in FY17.
Foolish takeaway
BHP's share price is likely to remain under some pressure if earnings remain low. However, a recovery in commodity prices over the next few years could see the share price head back to $30.
