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What to Know About Investing in Raw Materials

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For businesses right now, raw materials prices and supply shortages are creating massive headaches. 

Raw materials are the substances used in the production of goods. They’re commodities bought and sold on exchanges throughout the world. Traders can buy and sell materials in the factor market because they are factors of production, like capital and labor. 

For example, the raw material used to make carbon fibers is polyacrylonitrile or PAN. Then, carbon fiber, because of its rigidity and strength-to-weight ratios is used in aerospace, auto manufacturing, military components, sports equipment, and medical equipment, among other uses. 

Since raw materials are surging in price, there are opportunities for investors, but how?

Below we talk more about what retail investors might want to know about raw materials.

An Overview of Raw Materials

Raw materials can be any input item that a company needs to make its products. Steel is an example of a raw material the auto industry relies on. 

Other raw materials can include corn, grain, gas, lumber, minerals, and natural gas. 

Raw materials can also be categorized as direct materials. Direct materials are used directly in manufacturing. Indirect materials aren’t part of the final product but are used during the production process. 

Basic Materials Stocks

The basic materials sector is a way that you can invest in raw materials. These options are often overlooked by retail investors, though.  You might not frequently think about the companies, for example, that mine the metals used in chips or the chemical producers for medications used all over the world. 

Everything you buy, product or service, requires the use of at least one basic material. 

We’ve touched on these a bit, but some of the most commonly used raw materials include:

  • Precious metals like gold, silver, and platinum. These are rare and expensive to mine, so they have a high value. 
  • Oil drives the energy sector. Oil is refined and then used to create products like gas and diesel fuel. 
  • Wood is used to build homes and furniture, as well as other structures. 
  • Iron ore is a raw material used to produce steel. 
  • Raw chemicals are used for medicine, cleaning supplies, and many of the other things we use daily in our lives in developed countries. 

Most but not all basic materials are naturally-occurring. 

Some are renewable, like wood. Others are finite. Finite basic materials mean that it can take thousands or millions of years for them to develop. Oil is a good example of a finite material. 

When you invest in raw materials, it’s also called commodity investing

Commodity investing has piqued the interest of a lot of investors right now because this can protect against inflation, which is at historic highs. The demand for commodities tends to be high during periods of high inflation, and that drives prices up. 

Investing in commodities is also a good bet against the dollar. When the dollar declines, commodity prices rise. 

What Are the Upsides of Investing in Basic Materials?

Every investment comes with risks and some more than others. Basic materials are no exception. 

The pros of investing in commodities and materials include protection against inflation and diversification for your portfolio. It’s also a way to hedge price risks and a decline in base currency. 

There is always going to be a demand for basic materials. They’re the foundation for daily life. 

Basic materials never become obsolete. 

Some basic materials stocks are cyclical, meaning they move up and down with economic conditions. That can help with timing them. 

When you have a basic understanding of the current economic conditions, you might be able to get a better idea of whether you should buy or sell. 

Along with the cyclical basic materials stocks, some are considered safe-havens. Safe havens mean that when the market is on the decline and economic conditions are bad, people put their money into these stocks leading to gains. 

Gold and silver are often safe-haven stocks. 

What Are the Downsides of Basic Materials?

No investment is without risk, and this is true of basic materials. 

First, cyclical stocks aren’t inherently a good thing for all investors. If you’re looking for consistent, steady passive growth through dividends, basic materials aren’t an ideal option. 

There can be a lot of volatility—sometimes more so than in other investment areas. 

Finally, there’s also no guarantee even big companies are going to generate profits. For example, there can be companies that have market caps in the billions, and they don’t make any profit.