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 companies engaged in mining and metal refining, chemical products, and forestry products.

Companies in this sector supply most of the materials used in construction. Thus, they are sensitive to changes in the business cycle and tend to thrive when the economy is strong.

Basic Materials Explained

Companies included in the basic materials sector are involved in the physical acquisition, development, and initial processing of the many products commonly referred to as raw materials. Oil, gold, and stone are examples.

Raw materials, for the most part, are naturally occurring substances and resources. Some are finite. Others are reusable but are not available in infinite quantities at any given point in time.

The most common materials within the sector include mined products, such as metals and ore, and forestry products, such as lumber and paper. The stocks of certain chemical producers and energy sources also are included in the basic materials sector. Containers and packaging also are considered basic materials, whether they're made of glass, metal, or cardboard.

Basic Materials or Not?

Not all businesses that work with basic materials qualify for inclusion in the sector. For example, while a metal mining company is considered a basic materials processor, a jeweler, even one who works only with mined metal, is not. It is deemed a user of the basic material.

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

There are more than 200 mutual funds, index funds, and ETFs that cover the basic materials sector.

Energy Sources

Certain energy sources, notably natural gas, are considered basic materials. Crude oil and coal qualify in their natural state as do some refined products such as gasoline.

The more refined versions of these products are included because the demand for them is nearly universal. They are critical to the operation of almost every industry.

Demand for Basic Materials

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

The basic materials sector also can be affected by shifts in the housing market as many produced raw materials are used in construction projects. If new housing development slows, the demand for lumber products may decrease.

Key Takeaways

  • The basic materials sector is made up of companies involved in the discovery, development, and processing of raw materials.
  • Most industries rely on companies in this sector for the raw materials they need to manufacture their goods.
  • Basic materials are substances that occur naturally such as oil, stone, and gold.
  • The basic materials sector is subject to supply and demand.

Real World Examples of Basic Materials Companies

Three of the biggest American companies are included in the basic materials sector, and all three are involved in the oil business. These are Exxon Mobil, Chevron, and the oil field services company Schlumberger Ltd.

DuPont and Monsanto, chemicals companies, are also listed in this sector, as well as two big producers of construction materials, Vulcan Materials, a producer of crushed stone, gravel, and concrete, and Steel Dynamics, a maker of finished steel products.