Basic Materials Sector

The Basic Materials Sector: An Overview

The basic materials sector is an industry category made up of businesses engaged in the discovery, development, and processing of raw materials. The sector includes companies engaged in mining and metal refining, chemical products, and forestry products.

Within this sector are the companies that supply most of the materials used in construction. That makes the companies and their stocks sensitive to changes in the business cycle. They tend to thrive when the economy is strong.

The category is sometimes referred to simply as the materials sector.

Basic Materials Explained

Companies 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.

For the most part, raw materials are naturally occurring resources. Some are considered finite. That is, it takes millions of years for them to develop, well outside the long-range plans of any company. Others are reusable but are not available in infinite quantities at any given point in time.

The Basic Materials Stock Sector

For the purposes of stock categorization, the most common materials within the sector are mined products, such as metals and ore, and forestry products, or lumber. The stocks of certain chemical producers and energy sources also are included in the basic materials sector.

Containers and packaging are categorized as basic materials, whether they're made of glass, metal, or cardboard.

Basic Materials or Not?

Not all businesses that work with basic materials are included in the sector. For example, while a metal mining company is considered a basic materials processor, a jewelry company, even one which works only with mined metal, is not. It is deemed a retailer or a wholesaler who is a buyer of the basic material.

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

More than 200 mutual funds, index funds, and ETFs focus their investments in 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 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 their production also drops.

The basic materials sector also is affected by shifts in the housing market as many raw materials are finished in order to be used in construction projects. If new housing development slows, the demand for lumber products decreases.

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 Corp., Chevron Corp., and the oil field services company Schlumberger Ltd.

DuPont de Nemours and Co. and Monsanto Co., both chemicals companies, are listed in this sector. So are two big producers of construction materials, Vulcan Materials Co., a producer of crushed stone, gravel, and concrete, and Steel Dynamics Inc., a maker of finished steel products.

Basic Materials Stocks

More than 300 stock mutual funds, index funds, and exchange-traded funds (ETFs) focus on investments in the basic materials sector.

The many ETFs include Vanguard's Vanguard Materials ETF, Blackrock's iShares Global Materials ETF, and iShares U.S. Basic Materials ETF.

Mutual funds in the sector sometimes focus narrowly on one segment, such as the Fidelity Select Chemicals Fund and the VanEck Vectors Gold Miners ETF.