What is the 'Basic Materials Sector'?

The basic materials sector is a category of stocks for companies involved in the discovery, development and processing of raw materials. The sector includes the mining and refining of metals, chemical products and forestry products. The basic materials sector is sensitive to changes in the business cycle. Because companies in this sector supply materials for construction, they depend on a strong economy.

BREAKING DOWN 'Basic Materials Sector'

This sector is also sensitive to supply and demand fluctuations because the price of raw materials, such as gold or other metals, is largely demand driven. The basic materials sector is responsible for the physical acquisition, development and initial processing of products commonly referred to as raw materials. Often, these are naturally occurring substances and resources. They can also finite in nature to some degree; although the materials may be reusable, they are not available in infinite quantities at any given point in time.

Some of the most common materials covered within the basic materials sector include any mined materials, such as metals and ore, as well as forestry products, such as lumber. Certain chemical producers and energy sources also qualify as part of the basic materials sector. Not all businesses that work with basic materials qualify as part of the sector. For example, while metal mining is considered a basic materials processor, a jeweler, even if it only works with the mined metal, is not. Instead, it is a user of the basic material.

Qualifying Chemicals

Not all chemicals qualify as basic materials. For example, industrial fertilizer and paint additives belong to complex cleaning products or pharmaceuticals. 

Energy Sources

Certain energy sources, such as natural gas, are considered basic materials. Crude oil and coal qualify in their natural state as well as certain refined products such as gasoline. The more refined versions are included due to their significance in basic industry operations. Although they go through significant processing, they are critical to almost every type of industry.

Basic Materials Sector and Economic Shifts

The basic materials sector is subject to the law of supply and demand in the same way as consumer goods. If the demand for associated consumer goods drops, the demand for the raw materials involved in the production of those goods also drops.

Further, the basic materials sector can be affected by shifts in the housing market as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for lumber products may also decrease.

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