Why I'm wary of these 5 ASX listed 'commodity' companies

Why these ASX companies reliant on commodities are not high on my buy list.

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When most ASX listed companies raise the prices of their products or services, they sell fewer of those products or services. However, for some ASX 200 companies, this is not the case. A company that can maintain volumes while charging more likely holds a monopoly type position in its industry. These types of companies are unique and valuable.

ASX Ltd (ASX: ASX) might be an example of this type of company, as it has no Australian competitors. This leaves its customers with little choice but to pay the prices it charges. ASX shares have performed well over the past 10 years, with its dominant market position translating into an average annual rate of return to shareholders of 15%. 

Commodity companies on the ASX

Some companies are not able to set their own prices. These are usually companies which sell commodities. That is, products or services which are not unique and can be bought from more than one supplier. These companies must accept the price set by the market. If they try to charge more than this price, customers will simply go elsewhere. The performance of this type of company will be tied strongly to the price of the commodity they are selling.

Mining companies like BHP Group Ltd (ASX: BHP), Newcrest Mining Limited (ASX: NCM) and Rio Tinto Limited (ASX: RIO) are examples of traditional commodity companies. These companies may perform well for sustained periods of time, however, changing metal prices could put this to an end with little these companies can do to prevent it.

Companies like Qantas Airways Limited (ASX: QAN) and Bellamy's Australia Ltd (ASX: BAL) could also be viewed as businesses which sell commodities. This is because their product offerings are not all that unique from other products available on the market. These companies use branding as a means of distinguishing their products from their competitors. This tactic can be successful, however, it requires a very strong and distinguishable brand before a higher price can be charged.   

Foolish Takeaway

In my view, companies which sell commodities are less desirable to invest in than those companies which are able to set their own prices. A company which can raise the price of its products or services with little reduction in volume is the most desirable. However, the share price of a company is also a key consideration and should be factored into any investment decision. The price paid for shares will be a significant factor in the long term returns achieved.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bellamy's Australia. 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 Scott Phillips.

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