Capital cycle

The recurring pattern in capital-intensive industries: high returns attract investment, the new capacity arrives together, prices collapse, investment stops, capacity shrinks, and returns recover.

The lesson for an analyst is counter-intuitive and well evidenced. The best time to buy a cyclical business is when its returns are terrible and nobody is adding capacity; the worst is when returns are excellent and the industry is building.

Supply is the variable to track, because demand forecasts are unreliable and capacity announcements are public. Order books of equipment makers, project announcements and import data all measure it.

Watch what the industry is building, not what it is earning.