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The Introductory Guide to Materials Sector Stocks

Materials sector stocks are linked to most industries but are highly volatile.

Filip Dimkovski - Writer for Fortrade
By Filip Dimkovski
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Edited by Dragan Stevanovic

Published October 1, 2024.

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Besides the financial and tech sectors, the materials sector is one of the few primarily connected to most industries nowadays. Unfortunately, the sector is sometimes shunned for its carbon emissions and environmental impact.

However, with new sustainability practices and the ever-present supply and demand for materials, these stocks remain one of the most important trading instruments in the market.

Note: The information in this blog is purely educational and should NOT be considered advice.

What Are Materials Sector Stocks?

Materials sector stocks are shares of companies that discover, develop, and process raw materials, such as metals, chemicals, construction materials, and forestry products.

This sector is fundamental to the economy, providing essential goods used in manufacturing, construction, and various industrial processes.

The sector's performance is closely tied to global economic health, industrial demand, and infrastructure development. As such, it is a critical indicator of economic trends.

Materials stocks are highly sensitive to economic cycles, commodity prices, and global demand for raw materials compared to other sectors.



Materials Sector Sub-Industries

Mining

The mining sub-industry encompasses the exploration, extraction, and processing of valuable minerals and metals.

This sector is divided into compartments based on the type of materials extracted, including precious metals, rare earth metals, and other minerals.

Examples include:

  • Barrick Gold Corporation (GOLD), a leading international gold mining company
  • Freeport-McMoRan Inc. (FCX), a significant global copper, gold, and molybdenum company

Basic and Specialty Chemicals

The chemicals sub-industry involves the production of chemicals used in manufacturing, agriculture, construction, and consumer products.

The sub-industry is segmented into:

  1. Basic chemicals: These are produced in large quantities and used across many sectors.
  2. Specialty chemicals: Formulated for specific industrial applications or consumer products.

Examples include:

  • BASF SE (BASFY), one of the world's largest chemical producers
  • Dow Inc. (DOW), a leading materials science company with a vast range of products

Construction Materials and Building Products

The construction materials sub-industry manufactures products for the construction and infrastructure sector, including:

  • Steel for structural frameworks
  • Aluminum and copper for electrical and plumbing applications
  • Glass for windows

Demand in this sector is closely linked to construction and infrastructure development activities.

Examples include:

  • Nucor Corporation (NUE), a high-quality, low-cost, profitable global steel products company
  • Alcoa Corporation (AA), an industry leader in bauxite, alumina, and aluminium products

Forestry

The forestry sub-industry covers managing, harvesting, processing, and selling timber for various uses, including lumber for construction, paper for printing and packaging, and other wood-based products.

Sustainable forestry practices are essential for maintaining ecosystems and ensuring a renewable supply of wood products.

Examples include:

  • Weyerhaeuser Company (WY), one of the world's largest private owners of timberlands
  • International Paper Company (IP), a global leader in paper and packaging solutions

Key Definitions and Terminology

Basic Materials

Basic materials are raw inputs used to produce finished goods, including metals, minerals, chemicals, and forestry products. These materials are vital to manufacturing and construction processes.

Commodity Stocks

Commodity stocks are shares of companies that produce or extract commodities such as oil, gas, metals, and agricultural products.

Commodity prices and market demand directly influence these stocks.

Commodity Pricing

Commodity pricing is the process of determining the price at which raw materials are bought and sold in the global market, driven primarily by supply and demand.

These prices are sensitive to a wide range of factors, including but not limited to:

  • Changes in production levels
  • Inventory supplies
  • Geopolitical events
  • Technological advancements
  • Shifts in consumer demand

For instance, an unexpected increase in oil production can lower oil prices. On the other hand, a higher demand for metals due to technological innovation or infrastructure development could drive prices up.

Supply Chain

The supply chain encompasses entities, activities, information, and resources for moving a product or service from supplier to customer.

In the materials sector, this means:

  • Extraction of raw materials
  • Processing and manufacturing
  • Transportation
  • Distribution to the end user

Supply chains in this sector are complex. They span multiple countries and are often disrupted by logistic challenges, regulatory changes, and environmental policies. 

Geopolitical Factors

Geopolitical factors include the influence of political decisions, economic policies, and international relations on global markets and commodity prices.

In the materials sector, these factors are best seen in:

  • Trade agreements or disputes
  • Tariffs
  • Sanctions
  • Political instability in resource-rich regions

Geopolitical events can lead to fluctuations in commodity prices. These events affect supply chains, change the availability of raw materials, and shift global demand. For example, a political conflict in a central oil-producing region would affect international oil prices.

A Closer Look at Materials Sector Stocks

The materials sector has changed due to technological advancements, moving towards sustainable practices and more efficient extraction. The sector's performance has followed global economic trends, growing in industrial booms and facing vulnerability during downturns.

Volatility

The materials sector stocks often exhibit volatility based on the following:

  • Geopolitical events
  • Trade policies
  • Environmental regulations
  • Fluctuations in commodity prices
  • Supply chain disruptions

While price changes significantly impact profitability, effective supply chain management is essential to sustain production and meet demand.

This sector invests significantly in technologies that improve efficiency and reduce environmental impact, including mining, extraction, and processing technologies.

Environmental Impact and Policies

The materials sector faces environmental challenges related to resource depletion, habitat destruction, and pollution. A growing number of companies in this sector focus on sustainable practices, including recycling, reforestation, and reducing emissions.



Trade Real Materials With Stocks

The materials sector is the foundation that drives production in many industries. As such, stocks in the materials sector should be considered as follows:

  • A reflection of a particular industry's health
  • An indicator of the demand and supply of commodity
  • An instrument for potential profit

Since they are so intertwined with other industries, the materials sector stocks are also subject to volatility. Before trading, you should conduct extensive research and use analytics to identify the best possibilities.

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