Basic Materials Sector: Definition, Examples, and Stocks

The Basic Materials Sector: An Overview

The basic materials sector is an industry category comprised of businesses discovering, developing, and processing raw materials. The sector includes mining and metal refining companies, chemical companies, 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 not available in infinite quantities at any given time.

The Basic Materials Stock Sector

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

Containers and packaging are basic glass, metal, or cardboard materials.

Basic materials or not?

Not all businesses that work with primary materials are included in this sector. For example, while a metal mining company is considered a primary materials processor, a jewelry company that works only with metal is not. It is deemed a reseller or wholesaler who buys the primary materials; all primary materials qualify as primary. For example, primary synthetic 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 primary materials sector.

Energprimaryrces

Specific energy sources, such as natural gas, are considered basic materials. Crude oil and coal qualify naturally, as do natural 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. They are closely related. When the demand for consumer goods drops, the demand for the raw materials involved in their production also drops.

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

Examples of Basic Materials Companies

Three of the most prominent American companies are in the primary materials sector. Aprimaryree is in the oil business: Exxon Mobil Corp., Chevron Corp., and the oil field services company Schlumberger Ltd.

DuPont de Nemours and Co. and Monsanto Co., both chemical 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 primary materials sector.1

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.