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Raw Materials


Raw materials are the basic components used in the production of goods, which are typically converted into finished products through manufacturing processes. These materials can be either naturally occurring, like minerals and agricultural products, or artificially created, such as chemicals and metals. In financial contexts, raw materials can impact industries, such as manufacturing and construction, and play a crucial role in determining the costs and profitability of companies.


The phonetic pronunciation of “Raw Materials” is: /rɔː məˈtɪriəlz/

Key Takeaways

    1. Raw materials are the primary, unprocessed substances that are extracted or harvested from the earth, which are used to manufacture finished products.
    2. These materials can be divided into two broad categories: biotic (derived from plants and animals, e.g. timber, wool) and abiotic (from non-living sources, e.g. minerals, metals).
    3. Raw materials play an essential role in various industries, including construction, manufacturing, and energy production, with their availability and fluctuating costs significantly impacting global supply chains and economies.


The term “Raw Materials” is important in business/finance because it refers to the fundamental and unprocessed components that are required for producing finished goods or services. Understanding and managing raw materials is crucial for businesses as these components can significantly impact production processes, supply chain efficiency, manufacturing costs, and consequently, the overall profitability of a company. Efficient procurement and utilization of raw materials can lead to competitive advantages by reducing production lead times, ensuring product quality, and optimizing resource allocation, ultimately contributing to a company’s success in its respective industry.


Raw materials are the fundamental building blocks for any business engaged in manufacturing or production, as they are the essential components that undergo transformation to create a final product. The purpose of these unprocessed or minimally processed materials is to provide the basic substances needed to create a wide variety of goods, ranging from day-to-day consumer items like electronic devices, clothing, and food, to heavy industrial equipment, vehicles, and infrastructure. They play a critical role in driving economic growth, as a steady and dependable supply of raw materials is indispensable for businesses to maintain efficient production cycles, cater to consumer demands, and remain competitive in the marketplace. The use of raw materials can determine multiple aspects of a company’s operations, such as costs, profitability, and sustainability. Quality, availability, and affordability of these materials directly impact the production process, shaping the nature of products created and, ultimately, their value to consumers. Companies often source raw materials from different regions as part of their global supply chain, which may be influenced by factors like commodity prices, geopolitical issues, and environmental concerns. An efficient and well-managed raw materials procurement strategy is essential, as it not only ensures cost-effectiveness but also promotes sustainable practices that minimize negative impacts on the environment and society. Consequently, raw materials remain a cornerstone of business and economic activity, highlighting their pivotal role in overall commercial success and progress.


1. Iron ore: Iron ore is a key raw material used in steel production. Mining companies like Rio Tinto, BHP Billiton, and Vale extract iron ore from the earth, which is then processed and combined with other elements to produce steel. This steel is used in various industries, including automotive, construction, and infrastructure. 2. Crude oil: Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Oil companies such as ExxonMobil, Chevron, and BP drill for and extract crude oil, which is then refined into various petroleum products like gasoline, diesel, and jet fuel. These products are crucial for transportation, manufacturing, and power generation. 3. Cotton: Cotton is a soft, fluffy staple fiber harvested from the cotton plant’s protective case around its seeds. It is a critical input for textile and clothing industries as a raw material for producing fabrics, clothing, and other woven products. Agricultural companies and farmers grow and harvest the cotton, which is then processed and sold to textile mills and garment manufacturers to create various products like shirts, jeans, and towels.

Frequently Asked Questions(FAQ)

What are raw materials?
Raw materials are unprocessed, natural resources or substances that are used to produce goods and products. These materials can be of various types, including metals, minerals, liquids, gases, and agricultural products.
Why are raw materials essential for businesses?
Raw materials are the primary input in many manufacturing processes. Businesses use these materials to create their products, and without access to these resources, production wouldn’t be possible.
How do businesses acquire raw materials?
Businesses can acquire raw materials through various means, such as purchasing from local or international suppliers, mining or harvesting resources, or growing and cultivating materials through agricultural methods.
Are raw materials and natural resources the same thing?
Yes, raw materials can also be referred to as natural resources. However, the term “natural resources” is broader and can encompass resources used for energy production (e.g., coal, oil), whereas “raw materials” specifically refers to resources used in manufacturing and production processes.
What are some examples of raw materials?
Some common examples of raw materials include:1. Metal ores (e.g., iron, aluminum, copper)2. Agricultural products (e.g., wheat, cotton, corn)3. Timber and wood4. Crude oil and natural gas5. Water and air6. Chemicals (e.g., sodium, chlorine, nitrogen)
How do raw material prices impact businesses?
The price of raw materials has a direct impact on the production cost of a business. When the prices of raw materials increase, it usually leads to higher production costs, which can affect a company’s profitability. It can also impact the final price of the product, potentially making it more expensive for consumers.
What factors affect the price and availability of raw materials?
The price and availability of raw materials can be influenced by several factors, including:1. Global supply and demand2. Geopolitical events3. Natural disasters or climate changes4. Environmental regulations and restrictions5. Technological advancements in the extraction, production, and processing of materials6. Currency exchange rates
How can businesses manage raw material supply chain risks?
To manage supply chain risks associated with raw materials, businesses can:1. Diversify their raw material suppliers and sources2. Maintain a buffer inventory of critical raw materials3. Have contingency plans in case of supplier disruptions4. Monitor global market trends and geopolitical events related to raw materials5. Invest in research and development for alternative materials or production methods

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