Understanding the Basic Materials Sector
Let me walk you through what the basic materials sector really is—it's an industry group consisting of companies that handle the discovery, development, and processing of raw materials. This includes firms in mining and metal refining, chemical production, and forestry products.
These companies provide most of the materials used in construction, which means their stocks react strongly to shifts in the business cycle. You'll see them perform well when the economy is robust. Sometimes, people just call this the materials sector.
Breaking Down Basic Materials
If you're looking at companies in this sector, they're all about physically acquiring, developing, and doing the initial processing of raw materials like oil, gold, and stone. The key point is that the finished raw materials from these companies get sold to nearly every other industry sector out there.
Most raw materials are natural resources—some are finite, taking millions of years to form, way beyond any business planning horizon. Others can be reused, but they're not infinitely available at any moment.
Key Takeaways on Basic Materials
- The sector consists of companies discovering, developing, and processing raw materials from gold and oil to timber.
- These materials support manufacturing in almost all industries.
- The sector is highly sensitive to economic ups and downs.
The Basic Materials Stock Sector
When we categorize stocks, the basic materials sector typically includes mined products like metals and ore, plus forestry products like lumber. It also covers certain chemical producers and energy sources. Even containers and packaging made from glass, metal, or cardboard fall into this category.
What Counts as Basic Materials?
Not every company working with these materials makes the cut for this sector. For instance, a metal mining company qualifies as a basic materials processor, but a jewelry company using that metal is just a retailer or wholesaler buying the material.
The same goes for chemicals—not all qualify; things like industrial fertilizers or paint additives get classified as complex cleaning products or pharmaceuticals instead.
Energy Sources in the Sector
Certain energy sources, like natural gas, count as basic materials. Crude oil and coal in their natural states do too, along with refined products like gasoline. These are included because demand for them is universal—they're essential for running almost every industry.
Demand Dynamics for Basic Materials
This sector follows supply and demand just like consumer goods do, and they're interconnected. If consumer goods demand falls, so does the need for the raw materials to make them. Shifts in the housing market hit hard too, since many raw materials end up in construction—if new developments slow, demand for lumber drops.
Additional Key Takeaways
- Companies in this sector discover, develop, and process raw materials.
- Most industries depend on them for manufacturing inputs.
- Basic materials are natural substances like oil, stone, and gold.
- The sector responds to supply and demand pressures.
Examples of Basic Materials Companies
Some of the largest U.S. companies in this sector are in oil, like Exxon Mobil Corp., Chevron Corp., and Schlumberger Ltd. for oil field services. Chemical giants DuPont de Nemours and Co. and Monsanto Co. are here too, along with construction material producers like Vulcan Materials Co. for crushed stone, gravel, and concrete, and Steel Dynamics Inc. for finished steel.
Investing in Basic Materials Stocks
There are over 300 stock mutual funds, index funds, and ETFs that target the basic materials sector. Examples include Vanguard Materials ETF, iShares Global Materials ETF, and iShares U.S. Basic Materials ETF. Some mutual funds narrow in on specifics, like the Fidelity Select Chemicals Fund or the VanEck Vectors Gold Miners ETF.
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