Insights

Why supply and demand is the enemy of ASX resources shares

With the Beach Energy Ltd (ASX: BPT) share price dropping 20% today, we see the full effect of supply and demand on ASX resources shares
The post Why supply and demand is the enemy of ASX resources shares appeared first on The Motley Fool Australia. –

Two stamps with 'supply' and 'demand' written on them

ASX resources shares like BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are uber-popular right now. And very understandably so. Over just the past month, Fortescue has added more than 13% to its market capitalisation, and BHP 6%. 

These ASX resources blue chips have also been some of the S&P/ASX 200 Index (ASX: XJO)’s best performers over the past year or so, well outperforming other blue chip shares like Woolworths Group Ltd (ASX: WOW) and the big four banks.

But the performance of Beach Energy Ltd (ASX: BPT) today has brought the viability of investing in ASX resources shares into focus today. Beach shares have shed a nasty 20% today. That’s a fifth of its value gone in just a few hours.

Why the drop? Well, it was a response to Beach’s quarterly update, which we pulled apart this morning. In a nutshell, oil production dropped 5% quarter-on-quarter, and 15% in the same quarter last year. 

Supply and demand: The master of ASX resource shares

It’s part of a problem all ASX resources shares face: supply and demand. All miners and drillers are beholden to these same forces. Companies have to ensure their own supply streams for one. If production falters, there’s simply less money in the bank. Contrast that to a company like Apple Inc (NASDAQ: AAPL). If iPhone supplies diminished, it would likely result in a supply squeeze, which may even spark higher prices. Beach, or BHP, or Fortescue, cannot do the same because, unlike Apple, they have no control over the global market of their products.

Further, supply and demand always ensure that the prices of the commodities remain balanced to a degree. Apple can raise its iPhone prices every year, compounding on each other over time. Commodities don’t work like that. If iron ore prices are high (as they are now), the market pricing mechanism encourages producers to open up new mines and expand production. Over time, this inevitable increase in supply tends to bring the price back to a median. Once again, we see that resources companies are not in control of their own destiny like Apple is. Once the cycle comes full circle and prices are depressed, it does encourage the uncompetitive players to get out of the market, helping the largest incumbents. But waiting for this process to play out while prices are low is a long and costly endeavour. 

Foolish takeaway

Supply and demand are factors that are always at play with ASX resources shares – and often work against the shareholder. Of course, if an investor can time a commodity cycle well, or find a truly top-notch producer at a good price, there’s plenty of upside in this space to take advantage of. But it can often be a tricky path to walk.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

See The 5 Stocks

*Returns as of February 15th 2021

More reading

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple and recommends the following options: short March 2023 $130 calls on Apple and long March 2023 $120 calls on Apple. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why supply and demand is the enemy of ASX resources shares appeared first on The Motley Fool Australia.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;


To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.


An active and funded account with a positive trading balance is required to continue to have access to the tools;


Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;


Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!