Does the stock market value of companies that supply a good rise or fall if they are unable to meet the demand for that good?

It would seem sensible that if a company has a rare and in demand resource they would see an increase in profits and their stock value would rise, but all I know about the stock market is that I don’t know enough to assume anything. Maybe the shortage encourages similar businesses from other cities or states to set up shop in the place of shortages and become competitors, so devaluing the original company?

I am going to go to sleep so thanks in advance to anyone that might answer here.

esselte said:

Does the stock market value of companies that supply a good rise or fall if they are unable to meet the demand for that good?

It would seem sensible that if a company has a rare and in demand resource they would see an increase in profits and their stock value would rise, but all I know about the stock market is that I don’t know enough to assume anything. Maybe the shortage encourages similar businesses from other cities or states to set up shop in the place of shortages and become competitors, so devaluing the original company?

I am going to go to sleep so thanks in advance to anyone that might answer here.

If the shortage is because of increase in demand, that’s good for stock prices.
If the shortage is because of supply difficulty, that’s bad for stock prices.

At a guess.

But stock prices depend on rumours rather than facts, don’t they?

Before I go to sleep, just had the thought that the market might be too broad for any one definitive answer. Does an international iron ore mining company stock react the same way as a franchised building supply store? Probably not. So I will give a specific example:

Let’s say the US president decides to build a full size Death Star to be the base of the space force. So America starts spending all the money buying steel to build this thing, sending it in to space and so leaving a severe shortage of steel for people to build things with on Earth. The companies involved in the production and supply of steel get lots of money from America, but does their stock price go up or down?

mollwollfumble said:

If the shortage is because of increase in demand, that’s good for stock prices.
If the shortage is because of supply difficulty, that’s bad for stock prices.

At a guess.

But stock prices depend on rumours rather than facts, don’t they?

Now that I’m wondering about this, of course, I can’t get to sleep.

What you said seems reasonable. I’ve thought of another example, more realistic than the Death Star.

Brunei decides it’s going to construct a massive complex of twenty mega sky scrapers. As and artistic and architectural flourish these buildings will all heavily feature aluminium. External cladding, internal walls, doors, desks. Construction takes 20 years and for that time a large proportion of the aluminium produced in the world is shipped to Brunei. Some is still shipped all over the world, but in much smaller quantities and higher prices than previously. Now let’s say there’s an individual aluminium supplier, multinational and listed on the ASX. Aluminium prices in Australia are very high for 20 years. Does the stock price of the aluminium supplier on the ASX rise or fall in that 20 years?

So is that an example of an increase in demand (Brunei suddenly demanding a lot of aluminium) or of a supply problem to the rest of the world, with their demands not being met?

esselte said:

mollwollfumble said:

If the shortage is because of increase in demand, that’s good for stock prices.
If the shortage is because of supply difficulty, that’s bad for stock prices.

At a guess.

But stock prices depend on rumours rather than facts, don’t they?

Now that I’m wondering about this, of course, I can’t get to sleep.

What you said seems reasonable. I’ve thought of another example, more realistic than the Death Star.

Brunei decides it’s going to construct a massive complex of twenty mega sky scrapers. As and artistic and architectural flourish these buildings will all heavily feature aluminium. External cladding, internal walls, doors, desks. Construction takes 20 years and for that time a large proportion of the aluminium produced in the world is shipped to Brunei. Some is still shipped all over the world, but in much smaller quantities and higher prices than previously. Now let’s say there’s an individual aluminium supplier, multinational and listed on the ASX. Aluminium prices in Australia are very high for 20 years. Does the stock price of the aluminium supplier on the ASX rise or fall in that 20 years?

So is that an example of an increase in demand (Brunei suddenly demanding a lot of aluminium) or of a supply problem to the rest of the world, with their demands not being met?

It all boils down to profit and potential.

esselte said:

Brunei decides it’s going to construct a massive complex of twenty mega sky scrapers. As and artistic and architectural flourish these buildings will all heavily feature aluminium. External cladding, internal walls, doors, desks. Construction takes 20 years and for that time a large proportion of the aluminium produced in the world is shipped to Brunei. Some is still shipped all over the world, but in much smaller quantities and higher prices than previously. Now let’s say there’s an individual aluminium supplier, multinational and listed on the ASX. Aluminium prices in Australia are very high for 20 years. Does the stock price of the aluminium supplier on the ASX rise or fall in that 20 years?

So is that an example of an increase in demand (Brunei suddenly demanding a lot of aluminium) or of a supply problem to the rest of the world, with their demands not being met?

Good example. We’ve had engineering projects that require more than the world’s supply before. IIRC, the Golden Gate required more than the world’s supply of wire at the time.

I read it as follows. As soon as anyone realises that Brunei may need a lot of aluminium, the stock price will jump up. From the first hint, people will be calculating the probability that the project will go ahead, and that a particular company will be the supplier. As that probability rises, so the price will rise.

There will be investors who see the price rise and jump on the bandwagon and over-inflate the price rise. At worst a Poseidon-like bubble that is going to burst.

There will be stock price corrections after that, but the most significant price changes will be in advance of announcements and signing of contracts.

Well before the start of the first construction, long before any shortages, the price will be pretty well set.

Now let’s say that the aluminium supply situation is as it actually is today, with 200 smelters around the world (including closed ones). Companies will be scrambling to increase production. At least three, including Portland in Victoria are operating at under capacity. Helguvíkurvegur in Iceland is partially complete with construction suspended in 2008. They’re the immediate winners. Can recently closed plants be reopened, eg. Kanbara in Japan? How quickly can capacity be increased? How quickly can new smelters be built in China and elsewhere? The stock price will speculate on all of these.

Stock prices will also reflect flow-on effects. Bauxite mining equipment, equipment needed for bauxite refining, construction equipment for electrolysis, transport. All major changes in stock prices will be in advance of signing of contracts. There will be a fall in stock prices for those industries hardest hit by the rise in aluminium prices.

IMHO.

In summary, this is a case of increased demand and both aluminium production and price will rise. Profits will rise (unless management is incompetent) and share prices will rise in advance of profits. Other aluminium users will be hit by the rising prices and will see a fall in share prices, again in advance of the aluminium price rise.

At the end of 20 years … that’s another question.

esselte said:

Does the stock market value of companies that supply a good rise or fall if they are unable to meet the demand for that good?

It would seem sensible that if a company has a rare and in demand resource they would see an increase in profits and their stock value would rise, but all I know about the stock market is that I don’t know enough to assume anything. Maybe the shortage encourages similar businesses from other cities or states to set up shop in the place of shortages and become competitors, so devaluing the original company?

I am going to go to sleep so thanks in advance to anyone that might answer here.

No one cares about demand if you aren’t making any money selling it.

Too simplistic really, there are a multitude of factors or hocus pocus financial types use to ‘value’ a company.

From a quick read, I think everyone is over-complicating it.

If the companies’ profits go up, then the stock price will go up, unless there are very immediate and very obvious reasons why the profit rise is not sustainable.