Aluminum Industry in 1994

1572 WordsJan 31, 20097 Pages
The Aluminum Industry in 19941 and Aluminum Smelting in South Africa: Alusaf’s Hillside Project2 1) Is primary aluminum production an attractive industry? Why or why not? Within the framework of the Structure-Conduct-Performance (SCP) model3, the primary aluminum production industry (“the industry”) in 1994 can be described as perfectly competitive. The industry is characterized by a large number of competing firms – the largest of which has only 4.1% of total industry capacity; homogeneous, commodity-type products and low-cost entry and exit into and out of the industry (assuming capital is available where returns are greater than cost of entry). Within the industry, market prices are established via a commodities exchange (the…show more content…
In addition, the calculation of the long-run primary aluminum price (noted above and in Exhibit IV), indicates that prices are poised to improve over time – further supporting the attractiveness of this investment. As part of the Hillside investment, Alusaf was able to secure favorable contracts for two key components of aluminum smelting: power and alumina. Indeed, with power & alumina costs pegged at 41% of LME, Hillside would have variable costs of $670/ton - 10th lowest in the industry in 1994 - a position that would allow Alusaf to generate economic profits with aluminum at historically low prices, and significant profits at higher price levels. South African aluminum demand has largely been satisfied with existing South African capacity (and a small amount of imports). There has historically been very little opportunity for exporting, as world economic powers imposed trade sanctions on South Africa – likely as a form of punishment for its discriminatory political system (apartheid). However, the passing of 1993’s Transitional Executive Council Bill (which effectively ended apartheid) resulted in a number of world economic powers announcing that they would begin restoring normal economic relations with South Africa. It is expected that the restoration of trade with these nations will provide additional demand for South African aluminum – demand that could be satisfied with

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