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Why Moats Matter: The Morningstar Approach to Stock Investing by Heather Brilliant, Elizabeth Collins

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Chapter 9Basic Materials

At this point in the book, we shift from general to specific and drill down into various sectors to see what drives moat creation for different types of companies. Think of the following chapters as a reference manual that you can refer back to when researching a particular company or sector. In each chapter, we provide an overview of that sector’s moat landscape, discuss the factors that lead to wide and narrow moats for various industries, share some examples, and give you some key pointers to remember when doing your research. This is only the tip of the iceberg when it comes to the depth of our analysis around each sector, and we have chosen a small handful of industries in each sector to illustrate the key points. Our goal is to give you enough to get you started.

Let’s start with basic materials. A glance at the periodic table of elements will give you a quick sense for the products that basic materials companies sell. If a company isn’t directly producing one of the elements listed, chances are it’s manufacturing a compound or alloy from a combination of elements.

By definition, basic materials companies deal in commodities, which isn’t the most fertile territory for moat building. In commodity-based businesses, products are undifferentiated and prices are set by the law of supply and demand. These companies are considered price takers, meaning they have very little control over the prices of their products.

Given these dynamics, the key to gaining ...

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