Remember Marathon's loop from Capital Returns? High prices bring high returns, and capital floods in. Capacity arrives with a 3 to 7 year lag, because a greenfield smelter, mine or steel plant takes years to build. Then a supply glut hits. Prices collapse along with returns, capital flees as capacity closes, and the scarcity that follows brings high prices back. Commodities are the purest habitat for the loop, because the supply response is slow and lumpy, and that lag is what gives the cycle its amplitude.
How do you read the commodity cycle from supply?
The practical toolkit runs on supply, because everyone guesses at demand while supply gets announced in filings:
- Start with the industry's capex/depreciation ratio. When sector-wide capex runs >1.5 to 2× depreciation for years, a supply wave is being built. When capex stays <1× depreciation for years, the fleet shrinks while the next squeeze is being seeded. At company level, the same ratio separates "growth" claims from "maintenance" ones.
- Then count the announcement pipeline: announced capacity against current global capacity (WSA for steel, IAI for aluminium, company reports). New supply above ~1.5 to 2× trend demand growth means trouble is already scheduled.
- Watch financing behavior. Sector IPOs, QIPs and debt-funded expansions cluster at tops, because money is offered when returns look great. Asset sales, mergers and closures cluster at bottoms. The number of new equity raises in a commodity sector is a sentiment gauge in its own right.
- Then there's the China overlay, which applies to metals but decides a lot there. China produces and consumes roughly half the world's steel and aluminium. Chinese stimulus, property cycles, export rebates and capacity policy move global prices more than anything Indian producers do. The 2015-16 Chinese export flood crushed Indian steel and forced the Minimum Import Price and safeguard duties. China's 2021 capacity-curb phase did the opposite. If your Indian metals thesis never mentions China, it isn't a thesis yet.
- Finally, where to be in the cycle. The capital-cycle buy signal is capitulation in supply: closures, distressed sales, sector capex at decade lows and high-cost producers exiting. It usually coincides with the terrifying trailing P/Es you saw in the Deccan table. The sell signal is euphoria in supply: mega-capex announced, debt-funded M&A, "supercycle" theses on magazine covers and the lowest trailing P/E you've ever seen on the sector leader.