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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)

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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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