The way I see it, Minerals and special silks and such are still a thing, UPB's can't actually reproduce them. They can be mimicked, like a fine cloth or a pretty lens, but they can't be truely replaced.
By the sounds of the writing, you could get a replica Dino bone, Jewelled Headdress of a long dead Ruler, but the originals will always have true value.
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This represents one of several instances in the core books that it is stated that Mineral excavation and refinement are an important part of the economy and infrastructure. Which simply would not be efficient with the advent of UPB. instead any investor would simply put their resources into more Upb Manufacturing facilities. UPB Utilization Facilities, research and development, and Cybersecurity, ECT. There is no place for anything besides UPB in a world Where UPB exists.
Your co-dm is absolutely 100% right.
UPBs can even be spun out into fabric, broken down into component chemicals, reconstituted into new chemicals, or supplemented with base materials (such as dirt or sand) to form massive braces or walls. The right combination of hundreds or even thousands of UPBs can create everything from a comm unit to a laser weapon to powered armor
Right there it says point blank that it's used to make things that are made out of metal. So it absolutely can be turned into metal and minerals.
These titanic starships are of such extraordinary proportions that only the mightiest navies can afford to field one, and their hulls might represent the mineral wealth of entire moons.
This just means that UPB printing isn't the ONLY way that things are made. For any project people are going to look at UPBs or standard manufacturing and see which is best for their project. Sometimes that means standard production technqiues are used. The core rules mention that standard manufacturing is in use and is slightly more efficient than UPB printing but you need to be a megacorp to make money via the scale of production.
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UPB's have to be made from raw materials and chemicals that are mined or manufactured. Those have to come from somewhere, even if you have access to something like magic or matter-energy conversion. That will keep asteroid mining, chemical refining, and even farming as relevant and legitimate industries in a science fantasy setting like Starfinder.
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The point of UPBs is as a simplification of the crafting process explained away by pseudo-science technobabble for the purpose of gaming mechanics. They are there so that PCs don't need every expansion bay of their starship used to store the wide assortment of materials that would otherwise be needed to craft the wide array of items needed to function in a high tech adventuring environment. They are entirely for convenience. In the section on starmetals, it specifically states that those can't be replicated by UPBs, but for ease of game play, everything else can be. That UPBs can be used to make high value jewels etc by using an appropriate cost of UPBs can be 'explained' by just the correct parts of the UPBs would be used. (Though this obviously fails to explain what would happen to the waste mass, or why said waste mass couldn't be recycled for other projects.)
Now, as to fluff talking about industrial processes using raw materials instead of UPBs, that is because on that scale it is much more cost effective to do so (also explained right in the book as to why crafting with UPBs costs just as much as buying the item from the store). This does tend to imply that if PCs were to take the time and effort to obtain and refine the required raw materials that they could craft items at less than suggested retail value, but that is straight into homebrew crafting rules territory.
I think its also fair to note that UPBs vary in size and wastage depending on use. An Azimuth Laser rifle requires 425 of these UPBs to build, but the rifle of the same size, shape and general use such as the Zenith needs 722K of those UPBs. Other then cosmetic colour changes, its mostly the internals changing. Even taking into account the storage weight, thats also still over 700K bulk compressed down to 1 bulk, the same bulk as the 425 UPB item.
The UPB is more programmable star trek replicator battery than a physical component. You burn more energy making a more intricate and fancy weapon than a cheaper heavier one.
conservation of matter/energy is NOT in effect with UPBs.
UPBs are used to create pure starmetal in an AP so that you can repair a special ship component that needs it. The AP tells you how many UPBs you need to make the siccatite.
They can make anything at a ratio exactly matching their economic value.