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Why the iron ore price means it could be time to sell your mining companies

The iron ore price has dropped from around US$90 per tonne to US$73 per tonne in the last month. Consequently, this has sent Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) down from their 2017 highs by 15% and 23% respectively.

If you managed to buy the resource companies back at the start of 2016 then you are still sitting on an impressive gain, but it goes to show how unpredictable commodity prices can be.

Warren Buffett has frequently told investors over the years that the best businesses to own are the ones that have a strong brand, economic moat and competitive advantage which allows them to increase prices year after year to little detriment.

Commodity businesses have no such pricing power. The price they can get for their product is entirely based upon the global market rate for iron ore, oil, or whichever other commodities they dig out the ground to sell.

The best businesses to own are the ones that can strongly compound the returns they achieve on money they keep in the business. Great examples of this are companies like REA Group Limited (ASX: REA), Ramsay Health Care Limited (ASX: RHC) and Altium Limited (ASX: ALU).

There are only a few ways that commodity businesses can increase sales and profit. They can reduce costs, but there are only so many cost reduction strategies that can be implemented. They can achieve a higher price for their product, but that isn’t decided by them. Or, they can simply extract and sell more, but this usually has a detrimental effect on the price.

Foolish takeaway

I think the ‘easy money’ has been made on commodity companies already. The best an investor can hope for is a cyclical performance, which isn’t my kind of investment.

I wouldn't want to buy at these prices, instead I'd want to put my money into one of these three great businesses who do have pricing power and have been putting it to excellent use for years.

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Tristan Harrison owns shares of Altium and Ramsay Health Care Limited. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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