Research indicates that senior management of basic material industries must not only focus on optimizing yield but also on managing the cycle. To do this, they will need to develop a management team which possesses new skills, such as risk management, and which shares the same expectations about growth, returns, and cashflow.

Conventional growth strategies of companies in basic materials have proved extremely risky and destructive of value. Consider the results of 15 steel companies (Exhibit 1). For reversing these results, excellence in all value levers is essential (Exhibit 2).

Consider one of these elements, cycle-based acquisitions. Asset trading seems to be an attractive opportunity for growth compared with greenfield investments. Companies’ market value changes significantly along the cycle, leading to substantial value creation and growth opportunities. Counter-cyclical asset trading led BHP minerals to substantial growth, even amidst a severe downturn (Exhibit 3).

Research also indicates that investment decision rules based on NPV are misleading. Traditional NPV rules (based on "average" scenarios) are barely applicable in highly volatile environments. With option pricing methodology (OPM) and risk-adjusted investment criteria, the emphasis will be on smaller or faster projects (Exhibit 4). OPM induces higher than usual threshold levels, increasing returns and decreasing overall investment levels. Option valuing proves that investment in cyclical markets should proceed only when the present values of a project’s cashflows significantly exceed investments. In other words, the traditional NPV rules mask large downside risks in cyclical industries.

All of this adds up to a formidable management challenge that can only be overcome by interfunctional teams focusing on business problems. A holistic approach to capital management requires excellence in all three value dimensions: yield optimization, risk management, and growth (Exhibit 5).