Aluminum Industry in 1994
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 London Metal Exchange, or LME) and individual firms have little ability to set market prices. In a perfectly competitive industry social welfare is maximized – due largely to the lack of product differentiation and the number of competitors, while expected firm performance is normal. In the early 1990’s the collapse of the Soviet military caused Russian and other Soviet State smelters to flood the market with capacity that had previously supplied military needs. During 1993, LME inventories of primary aluminum increased by nearly a million tons, to over 2.5 million tons, while producer inventories increased by over 300,000 tons. This surge in supply & inventory levels drove world aluminum prices to all-time lows - $1,110/ton at the end of 1993, compared to over $2,500 per ton in 1988. In addition, the industry faces the threat of substitution (per Porter’s Five Forces Model4) – especially from secondary aluminum. Secondary aluminum’s advantages are driven largely by significantly lower energy costs vs. primary aluminum smelting. 1993 showed secondary aluminum growing at a 3.7%, 5-year CAGR rate. Meanwhile, primary aluminum production grew at a 1.4%, 5-year CAGR. The growth in secondary aluminum placed additional
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 London Metal Exchange, or LME) and individual firms have little ability to set market prices. In a perfectly competitive industry social welfare is maximized – due largely to the lack of product differentiation and the number of competitors, while expected firm performance is normal. In the early 1990’s the collapse of the Soviet military caused Russian and other Soviet State smelters to flood the market with capacity that had previously supplied military needs. During 1993, LME inventories of primary aluminum increased by nearly a million tons, to over 2.5 million tons, while producer inventories increased by over 300,000 tons. This surge in supply & inventory levels drove world aluminum prices to all-time lows - $1,110/ton at the end of 1993, compared to over $2,500 per ton in 1988. In addition, the industry faces the threat of substitution (per Porter’s Five Forces Model4) – especially from secondary aluminum. Secondary aluminum’s advantages are driven largely by significantly lower energy costs vs. primary aluminum smelting. 1993 showed secondary aluminum growing at a 3.7%, 5-year CAGR rate. Meanwhile, primary aluminum production grew at a 1.4%, 5-year CAGR. The growth in secondary aluminum placed additional