Invest in Commodities Companies - dummies

By Amine Bouchentouf

Because the commodities markets are so wide and deep, you have a number of investment vehicles to access these markets. While the futures markets certainly provide an avenue into the commodities markets, you can also achieve exposure to commodities in your investment portfolio by investing in commodity companies.

Integrated Commodity Companies

The equity markets offer a way for you to get exposure to commodities by investing in companies that process these natural resources. Some of these companies include large, integrated commodity-processing companies.

In the energy space, these are companies like ExxonMobil (NYSE: XOM) and Total (NYSE: TOT) that have exposure to crude oil and natural gas in both the exploration and distribution phase of the supply chain.

In the metals complex, companies like Rio Tinto (NYSE: TRP) and BHP Billiton (NYSE: BHP) mine minerals and metals as varied as palladium and nickel. These integrated mining companies have operations throughout the globe.

Specialized Commodity Companies

If you want to get exposure to a specific commodity through the equity markets, you can always invest in specialized commodity companies. These companies focus on either one commodity or on one aspect of the supply chain.

For example, oil tanker operators focus on transporting crude oil from Point A to Point B — that’s the extent of their activities. Other such companies include Starbucks (NASDAQ: SBUX), which focuses strictly on selling and marketing coffee-related products. These are good companies to invest in if you want exposure to a specific commodity through the equity markets.

Master Limited Partnerships

Master Limited Partnerships (MLPs) are hybrid investment vehicles that invest in energy infrastructure. They are in fact private partnerships that trade on public exchanges, just like stocks. This unique combination provides several advantages.

  • Because the MLP is a partnership, it has tremendous tax advantages because it doesn’t pay taxes on the corporate level, only on the individual level. It’s therefore not subject to the double taxation that many corporations are subject to.

  • Its mandate is to distribute practically all its cash flow directly to shareholders. It’s therefore not uncommon to have an MLP return $3 or $4 per unit owned.