I made exactly the same mistake when I did this. You have to give the subselect an alias. I have no idea why. Add an alias just after your group by:-
Code:
SELECT 
M.MACHINENAME, 
I.ITEMNAME [RAW MATERIAL], 
I.MATERIALSIZE, 
I2.ITEMNAME PRODUCTS, 
CASE 
	WHEN IT.UNITMEASUREID = 11 THEN
	sum(IT.QUANTITY) Else sum(IT.QUANTITY/ coil) End Coil2,
	
CASE
	WHEN IT.UNITMEASUREID = 1 THEN
	sum(IT.QUANTITY) else sum(IT.QUANTITY / coil) end Kilgram2
From  (

	Select (SELECT UNITVALUE FROM UNITMEASURECONVERSIONS WHERE UNITMEASUREID = 1 AND UNITMEASURECONVERSIONS.ITEMID = IT.ITEMID)*
	(SELECT UNITVALUE FROM UNITMEASURECONVERSIONS WHERE UNITMEASUREID = 11 AND UNITMEASURECONVERSIONS.ITEMID = IT.ITEMID )
	As COIL 
FROM ITEMTRANSACTIONS IT
JOIN DEPARTMENTS D ON D.DEPARTMENTID = IT.DEPARTMENTID
JOIN SECTIONS S ON S.SECTIONID = IT.SECTIONID
JOIN SUBSECTIONS SUBS ON SUBS.SUBSECTIONID = IT.SUBSECTIONID
JOIN SUBSECTIONAREAS SUBA ON SUBA.SUBSECTIONAREAID = IT.SUBSECTIONAREAID
JOIN ITEMS I ON  I.ITEMID = IT.ITEMID
JOIN ITEMS I2 ON I2.ITEMID = IT.ASSIGNTOITEMID
JOIN UNITMEASURES UM ON UM.UNITMEASUREID = IT.UNITMEASUREID
JOIN UNITMEASURECONVERSIONS UMC ON UMC.UNITMEASUREID = IT.UNITMEASUREID AND UMC.ITEMID  = IT.ITEMID
JOIN MACHINES M ON M.MACHINEID = IT.MACHINEID 

WHERE D.DEPARTMENTID = 4 AND S.SECTIONID = 13 AND SUBS.SUBSECTIONID =  4 AND SUBA.SUBSECTIONAREAID = 2 
AND (UM.UNITMEASUREID = 11 OR UM.UNITMEASUREID = 1)
Group by m.machineid,I.ITEMNAME,I.MATERIALSIZE, I2.ITEMNAME
as MyBaseValues)