Alusaf Case

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Managerial Economics Koç University Graduate School of Business MGEC 501 Levent Koçkesen The Aluminum Industry in 1994 • Aluminum smelting is a perfectly competitive industry: 157 smelters worldwide in 1993 • Traded at London Metal Exchange (LME) • Price in 1988 over $2,500 per ton • Price at beginning of 1994 about $1,100 per ton • Mainly due to the collapse of the Soviet Union and the resulting flood of aluminum into the world markets by the Commonwealth of Independent States (CIS) 1 Annual Average Primary Aluminum Price (Dollars per metric ton) 3000 2500 2000 1500 1000 500 0 1970 1975 1980 1985 1990 1995 • • • • 1971-74: price controls. 1973-75: OPEC oil embargo and increase in oil prices 1986-88:…show more content…
Sort the smelters according to AVC 580 2. Calculate cumulative capacity 3. Plot AVC against cumulative capacity 122 257 317 thousand tons per year 4 Aluminum Industry Supply Curve in 1993 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 S 1993 market price = 1,180 dollars/ton 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 0 5,000 10,000 15,000 20,000 25,000 1993 production = 19,800 D tons/year Aluminum Industry Supply Curve w/o CIS 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 w/o CIS dollars/ton 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 0 5,000 10,000 15,000 20,000 25,000 D tons/year 5 Alusaf’s Hillside Project • At the beginning of 1994, Alusaf was considering to build the world’s largest smelter (466,000 tpy) at Richard’s Bay in South Africa • A feasibility study was done two years before, but since then the Russian flood had occurred. • Capital cost was projected to be $1.6 billion • Aluminum prices at about $1,110 • Alusaf had long-term contracts that ensured perton alumina and power costs at 41% of aluminum price • Should Alusaf go ahead with the project? 1993 Operating Cost Structure ($/metric ton except where noted) Average Total electricity and alumina cost Other raw materials Plant power and fuel Consumables Maintenance Labor Freight General and administrative Total 683

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