Aluminum Smelting Case

Aluminum smelting group project 1

1. Primary aluminum smelting is not very attractive in the United States because it is a highly competitive, low margin business. Primary aluminum smelting would be more attractive if it was used in a vertically integrated business. This is backed by the evidence that the seven major competitors in the smelting industry average over 65% of their own production being processed in their own vertical integration. This fact alone would make this market look undesirable as a producer trying to sell into a global market. The demand curve has also been affected by the artificial cap on production that was imposed by the MOU (Memorandum of Understanding), this agreement put in place an agreed upon limit to the excess inventory that would be produced globally to 2 million tons. The results of this agreement were that a number of Western smelting plants idled production capacities by 950,000 tons. This would make investing money into a new smelting operation difficult, when the “established” companies and their smelting operations are running at less than full capacity and they would be able to quickly and efficiently increase production to take advantage ofincreased demand or margins presented in the marketplace.

Pricing is another challenge when it comes to deciding on building a new smelting plant; in 1994 the world market for Primary Aluminum was at an all-time low of $1100 per ton. This is due to several events that have happened recently. First we have the listing of Aluminum on the LME (London Metal Exchange), this allowed for a global pricing structure to be set for aluminum with traders buying futures and spot orders, thus establishing global pricing. This structure eroded much of the desirable profitability in the market and held the manufacturing operations to a standard that was less flexible in times of high energy costs or over production.

2. By our calculations contained in Attachment 1, the demand over...