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.
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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.
