SECTOR RESOURCES - Beat the booms and busts

It’s hard to predict the future in a volatile business so aim to minimise your downside

- Scott Phillips

If you’ve been paying attention these past few months, iron ore, nickel, lithium and, yes, oil have been in the headlines a lot. Sometimes for their use in new technologies, but mostly for their volatility and their susceptibility to risks, both economic and geopolitical.

But this isn’t new. Those of us with a little less hair these days will remember petrol rationing, and boom and bust in the iron ore sector. Prices have always been volatile for resources, because they are global commodities and supply is almost completely substitutable from one producer to the next.

Not only that, but the supply and demand for industrial commodities tends to ebb and flow. While the use of oil, for example, exploded during the 20th century, the amount being drilled increased and the technology improved, making extraction more efficient and keeping a relative lid on prices.

In other words, increasing demand is not enough to sheet home untold wealth to miners and drillers through soaring prices; if supply also grows, prices can remain static or even fall. Overlay that with speculative surges and falls in prices, and navigating this sector can be tricky.