Alusaf

Economics for Business Administration Case discussion: “The Aluminum Industry in 1994”

Problem 1 For constructing the supply function all the variable costs were determine, in which include the electricity, alumina, other raw materials, consumable and freight, as mention on page 5, last 2 paragraphs. The variable cost per ton (or the marginal cost per ton under our assumption regarding the shape of the cost function) was calculate for each producer.

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(a)

According to your graph, how many tons of primary aluminum should be supplied at the price that prevailed at the beginning of 1994? • The price at the beginning of 1994 was 1100$, therefore the aluminum supply should be 19400 tons.

(b)

Is your answer to (a) consistent with the data supplied in the case about the actual production levels in 1993? • In 1993 the aluminum production had reached to 19,781 according to the case.

(c)

If not, what can account for the discrepancy? • The collapse of the soviet military • Production of secondary aluminum continued to grow putting further pressure on primary aluminum. • Former eastern block countries • LME inventories of primary aluminum increased.

(d)

What was the total demand in 1993? What does that imply for prices? • Supply > demand  Irrational Capacity which stays up and running regardless of prices. State-owned capacity that would not have operated under normal market incentives, but operates because decisions are driven by non-profit considerations.

Problem 2 Alusaf is a large South African producer of aluminum. In 1994 Alusaf was considering building a new 466,000 tons per year primary aluminum smelter at Richard’s Bay, a deepwater port on the east coast of South Africa’s province of Kwa-Zulu Natal. The estimated cost of constructing the new smelter, called “Hillside,” was projected to be $1.6 billion dollars. Alusaf signed a 25 years supply contract for electricity with Escom, South Africa’s electrical power. According to the...