Simple Economic theory has often proposed four factors of production : land, labour, capital and entrepreneurship. Each of these factors of production have founded multifaceted industries. The factor of land, and subsequently all its resources is regulated by, and participates in what is known as the basic materials sector. This article will discuss what is the basic materials sector and how it functions as well as what basic materials stocks are.
Basic materials sector
The production of any product in any industry follows a similar chain of events – Raw materials are extracted, purchased by others and then refined in order to create the final good. In order to understand what basic materials stocks are, one must first understand what is a basic materials sector.
The basic materials sector is the industry that has formulated around the businesses that spearhead the process of discovery, development, and the processing of raw materials such as timber, metallic extracts such as silver, gold, aluminium, and even raw materials for energy production such as crude oil, coal and gasoline are considered as part of the same.
Interestingly, it isn’t just companies that deal with raw materials that are considered part of the basic materials sector. For instance, even a packaging company that makes cardboard boxes, is considered as part of the basic materials sector. If fact any kind of packaging company or container company is considered as such despite not being involved in the production or acquisition of raw materials. However, as packaging is considered a basic material and key input for all industries. It can be considered as a raw material.
On the other hand, something like a cutlery company, or a jewellery company, or a company that produces industrial fertilizers will not be considered as part of the basic material sector despite working with basic materials, often in their raw forms.
Basic material Stocks
Basic Material stocks are simply stocks of companies dealing in the acquisition and production of products considered to be Basic Materials. Basic materials stocks are categorized by similar commodities such as resources that are mined, such as coal or metal, as well as other natural resources such as wood and some chemical manufactures as well. The shares and stock of these companies trade as basic materials stocks in the market and there are a number of funds that focus specifically on either investing in the broad Basic Materials market or in specific industries or Basic materials. The demand for basic materials and subsequently basic materials stock varies greatly based on how the industry and economy is performing. The success of any basic materials company depends on the demand for their resource, which is, in turn, fueled by the demand for the final products that use their resources for production. For instance, the demand for concrete or chemical employed in paint is highly dependent on how the housing and real estate industry is doing as they are crucial ingredients in the same.
There are a number of advantages to adding basic materials stocks to your portfolio. Basic materials stocks largely follow economic trends and given their dependence on the performance of the broader economy, basic materials stocks can be a highly lucrative investment in a flourishing economy. The trading of basic materials stocks are considered a relatively safe investment given the relative stability their demand experiences. Commodities, which are what most basic materials are, are fairly stable for the most part, and an investor can be confident that demand for certain commodities will persist.
However, some also claim that they could increase the volatility of one’s portfolio given their dependence on economic trends. During a rise in international tensions, for example, these stocks can experience significant pitfalls as companies are exposed to more sanctions on the trade of various commodities that fall under the basic material umbrella.
The pandemic has affected the basic materials sector quite severely, given the contraction in consumption and demand in sectors and regions that are commodity heavy. Materials such as concrete and crude oil fell drastically over the course of the year, though gold, and precious metals have risen in value, as they are largely regarded as crisis commodities.