Basic Materials Sector
A group of companies involved in the discovery, extraction, and processing of raw materials
What is the Basic Materials Sector?
The basic materials sector is made up of companies involved in the discovery, extraction, and processing of raw materials. It includes mining, forestry, and chemical production.
Summary
- The basic materials sector is comprised of companies involved in the discovery, extraction, and processing of raw materials.
- The market for basic materials is based on the products that use those materials.
- The sub-sectors within basic materials include chemicals, metals and mining, and forestry.
Understanding Basic Materials Companies
All physical goods are made up of a combination of basic materials processed to create a finished good. Basic materials companies are the first stage in the supply chain of various goods, discovering and extracting natural resources. Therefore, not all companies that work with raw materials are considered basic materials companies. For example, while a packaging manufacturer may work with raw lumber in the creation of cardboard boxes, they are not considered a basic materials company.
The above diagram shows the supply chain for children’s toys. The orange outlines companies that would be operating in the basic materials sector. While processors of lumber, minerals, and plastic work with raw materials, they are not considered basic materials companies.
Commodities
Many of the materials that basic materials companies produce are considered commodities. A commodity is a good that trades on a standardized price. Therefore, the market doesn’t accord preference to the company that produced them.
Commodities trade on major markets throughout the world and their value fluctuates based on supply and demand and the cost of obtaining the commodity. Examples of commodities include gold and coal.
The Market for Basic Materials
The market for basic materials relies on the demand for the products that use those materials in production. As all physical goods are created from some kind of raw material, the demand varies greatly between markets. For example, the demand for lumber is heavily dictated by housing markets. If there is a great level of consumer spending and demand for new houses, there is an equally great demand for the lumber that is used to build those houses.
Another consideration when looking at the basic materials sector is the finite supply of natural resources. If the cost of discovering and producing basic materials increases, so will the consumer products that are made from the raw materials. Governments place taxes on basic materials to help control and limit the exploitation of natural resources.
- A – Government increases taxes on logging
- B – Low interest rates increase consumer spending on housing
- C – Housing market crashes
The above graph can be used to demonstrate how different factors affect the demand for lumber over time.
Basic Materials Sub-Sectors
There are several basic materials sub-sectors, including chemical products, metals and mining, and forestry products. The chemicals sub-sector includes a wide range of products, such as agricultural fertilizers, industrial gasses, and specialty chemicals used to make glues and paints.
Metals and mining also contains a broad range of companies, including minerals, oil, gold, aluminum, silver, and steel. Forestry consists of companies that harvest trees to produce lumber, paper, cardboard, and other similar products.
Energy Sector
Many large companies within the basic materials sector are part of the energy sector. The demand for energy is different than in other industries because they are represented by non-discretionary consumer spending. Individuals rely on several sources of energy to fulfill basic needs. For example, people need gasoline to fill their cars and natural gas to heat their houses. To some degree, all businesses also rely on energy to remain operational.
Companies and Indices
Exxon Mobile is the largest publicly traded basic materials company in the world, operating in the oil and gas sector. It is estimated that Exxon produces about 2% of the world’s energy and 3% of the world’s oil. They operate a number of business lines including natural gas and energy, chemicals, and oil.
During the 2000s, many emerging markets looked to basic materials as a source of economic growth. Countries in Africa, such as Botswana, were able to grow their economy significantly through the opening of mines and exploitation of natural resources such as diamonds.
However, more developed countries, such as Canada, also rely heavily on abundant natural resources. In 2019, Canada’s largest export was oil and natural gas, making up an estimated 10% of the country’s total GDP.
The Dow Jones Basic Materials Index is an index that tracks the performance of US basic materials companies. In Canada, the TSX Capped Basic Materials Index tracks basic material stocks on the TSX.
More Resources
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
