Commodity Cycle
The long swing in commodity prices driven by the lag between demand changes and the supply response.
How it is identified
Test: high prices induce investment in new supply, which arrives years later and depresses prices, discouraging investment in turn
Unit
qualitative
In depth
Commodity cycles are long because supply takes years to build — a new mine or refinery is a multi-year project — so high prices persist while capacity is constructed and then collapse when it all arrives together. This lag is why commodity producers are the archetypal cyclical stocks and why their price-to-earnings ratios invert: lowest at the peak of earnings and highest at the trough. The cycle affects Indian markets through metals, energy and agricultural inputs, and through the import bill. Identifying the position within a cycle is genuinely difficult and is not attempted here.
Worked example
A metals producer earns ₹100 a share at the cycle peak and trades at ₹800, a P/E of 8. At the trough it earns ₹10 and trades at ₹400, a P/E of 40. The cheap-looking multiple came at the worst moment.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Commodity Cycle” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.