Materials are used to create alchemy mixes that could be found in various locations.

"What do you get when mixing Materials with other Materials? Those pursuing the art should try it for themselves.
One Theory is that the Materials' numbers are multiplied, and the resulting mixture becomes enriched with Phozons."
- Note, Alchemy Part 2
The materials' numbers are multiplied when mixed with another material.

e.g. (Material 2 + Material 3 = Material 6)

Higher material numbers created into alchemy mixes will produce higher amounts of Phozons.