Most basic materials industries share a common problem: low profitability. In steel, pulp and paper, glass, and commodity chemicals, to name a few, periods of high profits alternate with heavy losses, yielding average returns that may not even cover the cost of capital. Many accept this rollercoaster ride as inevitable; such, they say, is the nature of cyclical industries. But the truth is, poor management makes the ride rougher than it need be. For though there is indeed a business cycle, its peaks and troughs are greatly exaggerated by decisions about when and how to add new capacity.

Take the paper industry. From 1991 to 1993 it experienced its worst years ever: high losses forced more than half the companies in some sectors to put assets up for sale. The crisis was not precipitated by a dramatic drop in demand; rather, it was massive new investments and overcapacity that caused the collapse in prices. Yet just three years later, and less than one year into recovery, new capacity additions amounting to as much as 15 to 20 percent of total output have already been announced in some segments, and many players are actively looking for new investment opportunities.

Waves...