...9 -7 0 4 -4 5 8 DECEMBER 15, 2003 KENNETH S. CORTS JOHN R. WELLS Alusaf Hillside Project At the beginning of 1994, Alusaf was considering building the world’s largest greenfield primary aluminum smelter, a 466,000-ton-per-year facility at Richard’s Bay, a deepwater port on the east coast of South Africa’s province of Kwa-Zulu Natal. Alusaf was the sole primary aluminum producer in South Africa, operating 170,000 tpy of capacity at the existing “Bayside” facility at Richard’s Bay. Alusaf’s 1993 revenues were $220.2 million, up 1% from 1992. Income was $8.6 million, up 122% from 1992. A feasibility study for the proposed “Hillside” smelter had been completed over the past two years. During this time, South Africa’s political regime had undergone a dramatic transformation with the 1993 passing of the Transitional Executive Council (TEC) Bill. This bill removed absolute power from the hands of whites and created a multi-racial body that would share responsibility for organizing and overseeing the general elections to be held in April 1994. Within days, Nelson Mandela, leader of the African National Congress party, addressed the UN Special Committee Against Apartheid in New York, calling on the international community to lift sanctions against South Africa. The European Union, the Organization of African Unity, Canada, China, Sweden, Singapore, India, and the United States all responded quickly with announcements that they would begin the process of restoring normal economic...
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...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...
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...9 -7 0 4 -4 5 8 DECEMBER 15, 2003 KENNETH S. CORTS JOHN R. WELLS Alusaf Hillside Project At the beginning of 1994, Alusaf was considering building the world’s largest greenfield primary aluminum smelter, a 466,000-ton-per-year facility at Richard’s Bay, a deepwater port on the east coast of South Africa’s province of Kwa-Zulu Natal. Alusaf was the sole primary aluminum producer in South Africa, operating 170,000 tpy of capacity at the existing “Bayside” facility at Richard’s Bay. Alusaf’s 1993 revenues were $220.2 million, up 1% from 1992. Income was $8.6 million, up 122% from 1992. A feasibility study for the proposed “Hillside” smelter had been completed over the past two years. During this time, South Africa’s political regime had undergone a dramatic transformation with the 1993 passing of the Transitional Executive Council (TEC) Bill. This bill removed absolute power from the hands of whites and created a multi-racial body that would share responsibility for organizing and overseeing the general elections to be held in April 1994. Within days, Nelson Mandela, leader of the African National Congress party, addressed the UN Special Committee Against Apartheid in New York, calling on the international community to lift sanctions against South Africa. The European Union, the Organization of African Unity, Canada, China, Sweden, Singapore, India, and the United States all responded quickly with announcements that they would begin the process of restoring normal economic relations...
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...• 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: Supply shortages 1991: Soviet Union Collapse 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? How can we use supply-demand analysis to understand price dynamics? How does this help in entry decisions? 2 Smelting Process • • • • • Smelting is the process of extracting aluminum metal from aluminum oxide (alumina) through electrolytic reduction. The fundamental component of a smelting operation is the electrolytic cell, or "pot" in which this reaction takes place. During smelting, large amounts of current pass through molten alumina dissolved in a chemical bath. This process separates out aluminum...
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...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: Supply shortages 1991: Soviet Union Collapse 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? How can we use supply-demand analysis to understand price dynamics? How does this help in entry decisions? 2 Smelting Process • • • • • Smelting is the process of extracting aluminum metal from aluminum oxide (alumina) through electrolytic reduction. The fundamental component of a smelting operation is the electrolytic cell, or "pot" in which this reaction takes place. During smelting, large amounts of current pass through molten alumina dissolved in a chemical bath. This process separates out aluminum metal...
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...The decision facing Alusaf Aluminum is whether or not to build a new smelting plant. It is the recommendation of the Petrel Consulting Team that given current market conditions, our predictions of future market conditions, and the return on investment (ROI) requirement, that the plant not be built. The analysis behind this decision was conducted in two discrete pieces: The market price needed to reach a 15% ROI; and a projection of the probability of reaching said price within a 5-year time horizon. It is important to note that Alusaf Aluminum will be operating in a competitive world market for a product that is virtually indistinguishable from other producers. This implies that Alusaf will have to sell its aluminum at the world rate. Consequently, income will be generated on a cost-savings basis. Determining the projected ROI To calculate the projected return on investment for Alusaf Aluminum, we calculated expected profit at the current global price for aluminum of $1110 per ton. The costs, which include electricity, alumina (as a raw product), other raw materials, plant, consumables, maintenance, labor, freight and overhead expenses, total to $825 per ton of aluminum produced. The above cost structure allows a profit of $285 per ton. Assuming that the Hillside plant operates at its full capacity of 466,000 tons per year, its total annual profit will be $132.7 million. Hence, this project provides Alusaf approximately 8.3% ROI. Using this same cost structure...
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...perfectly competitive market, firms are price-takers, and MR=p. Firms produce quantity Q such that p = MC. The firm’s supply curve is the inverse of the marginal cost curve. • Construct the market’s supply curve by adding the firms’ supply curves horizontally. Use the market’s supply curve to forecast the effect of demand shocks on the market’s price. • The effect of demand shocks on the market price are larger when supply is inelastic. • At this point, is our analysis complete??? • The decision of Alusaf depends on the forecast of the price of aluminum and the average cost of production. Alusaf’s Hillside Project Seems like a simple business… ! Competitive Market – identical product; no tech. differences; pricetakers ! No room for fancy marketing strategies; nimble operational improvements ! Profitability boils down to a simple equation price – average cost That cannot be that hard? ! Need to understand: • What determines prices? • Which costs are relevant to Alusaf s decision? • What drives industry dynamics? ! For this, we need an economic model...
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...Recommendation Although aluminum prices are at relative historic low today, we recommend that Alusaf go ahead with plans to construct the Hillside smelter plant. Based on the following analyses, we project the price of aluminum to rise to approximately $1,590 per ton in 5 years. This price exceeds the minimum required level of $1,416 per ton to yield Alusaf a positive net present value (NPV) on its initial plant investment of $1.6 billion. Analysis of Hillside plant profitability At a minimum market price of $1,416 per ton of aluminum, the Hillside plant can produce annual profits of ~$216 M, beginning in 1997. Discounting these annual profits to their 1994 value, using an 11% cost of capital, the project will be worth undertaking (see details in slide 1), assuming the price of aluminum holds at or above this level. Projections of primary world aluminum supply and demand To estimate the supply and demand levels of primary aluminum 5 years from now, we analyzed current supply capacity and world consumption. Supply Beginning with future supply, we assumed that producers would continue production as long as the market price exceeds their variable costs. State suppliers, however, are an important caveat; we assume that they are also currently producing aluminum at prices below variable costs, and will continue to do so, in order to meet strategic or economic needs. The model that we constructed based on these assumptions explains the current aluminum production...
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...Econ 511: Managerial Microeconomics Spring 2010 Syllabus Department of Economics Business School HKUST Yuk-fai Fong (房育辉) Time and Venue: Section 1: 9:00 a.m. – 12:20 p.m., Saturday, April 9 – June 4 (except April 23) Section 2: 2:30 p.m. – 5:50 p.m., Saturday, April 9 – June 4 (except April 23) Venue: Room Rm 4219 (Lift 19) Instructor: Yuk-fai Fong Email: y-fong@kellogg.northwestern.edu Phone: 2358-7600 Office Location: Room 3434 Email is always a great way to reach me. Office Hours: By appointment Course Web Site: http://lmes2.ust.hk Course Description Businesses exist to create and capture economic value. A business creates value by combining inputs such as labor, materials, and capital to make products and services that consumers need and desire. And it survives and thrives by charging a price that equals or exceeds the cost of delivering the products and services that consumers value. In this course, students learn how businesses optimally create and capture value and how their abilities in doing so are impacted by various market forces and the strategic interaction among players in the industry. A good understanding of the 1 economic principles that govern the distribution of value in markets is critical to formation of a successful and sustainable business strategy. Learning Objectives: Understand and apply tools, concepts, and theories from microeconomics to perform industry and demand analyses. Apply demand and supply analyses in predicting...
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...Alusaf Hillside Project 1. Is primary aluminum production an attractive industry? Why or why not? I consider primary aluminum production is not an attractive industry because : a. The product is identical (ie, aluminum), all the companies procure the same resources to make production with same production line and process. The firms only differentiate in terms of controlling and lowering the variable cost in order to make a profit as a price-takers. Pricing is somehow fix in global level as aluminum is openly traded in the financial market. b. Intensive rivalry and perfect competition. Since the collapse of the Soviet Union and Russia and the other former Soviet states surged the supply and flooded world markets while having price remains historical low in 1993. 2. At the market price of $1,110 per ton, given the supply curve you have derived, how much would be supplied under the assumption that all plants are profit maximizers? If all plants are profit maximizers, the capacity will be landed at where average variable cost = price, ie, $1,110. From the industry 1993 supply curve, the capacity at 19,412 thousands tpy when variable cost close to $1,110 (to be exact at $1,108.02). 3. At what rate do you expect primary aluminum demand to grow over the coming years (note that primary aluminum demand is total demand less scrap production)? What do you expect the price of aluminum to be in 5 years from 1993? From the industry supply curve, the capacity...
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...was proposed with a $120 million debt-side investment opportunity in the Mozal project, a $1.4 billion aluminum smelter in Mozambique. The initiative shareholders approached IFC for their participation in debt-side financing in pursue of the commercial viability and development impact. In this report, we will be analysing the project’s major risks that are expected to arise in the future, as well as assessing the likelihood of a successful investment from various aspects, until reaching a final lending decision. In addition, loan portfolio considerations regarding the addition of the new investment will be discussed. 2. Major risks In this part of the report, the 3 major risks involved in the Mozal project are assessed, including political risk, operational risk and market risk. 2.1. Sovereign risk Comparing to other two types of risks, sovereign risk is relatively higher and more important in the Mozal case, with potential expropriation and moral hazard being realistic threats to the project. Mozambique was one of the poorest countries in the world and had only recently emerged from a 17-year civil war that had destroyed most of the country’s infrastructure. The high sovereign risk is reflected in the hurdle rate that amounts to a much higher value than its internal rate of return. Regarding the financing gap of $250m, participation of IFC is essential and could be very beneficial to the project, considering its impact on lending decisions of other commercial banks. However...
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...EF 5010: Economics for Business Semester B 2014 Syllabus LI King King (李景景) Time and Venue Duration: 17January – 25 April 2014 (Every Friday) Time: 7:00PM-9:50PM Venue: AC2 -1503 Instructor Dr. LI King King Department of Economics and Finance Email: likingking@gmail.com Phone: 3442 7604 Office Location: AC2-5102 Personal Webpage: http://likingking.weebly.com/ Office Hours: Friday 5:00PM-6:00PM or through appointment via email. Email is always a great way to reach me. Course Website: Available on Blackboard Teaching Assistant WONG Chun Kit Christopher Email: chriwong@cityu.edu.hk Phone: 3442 9980 Office Location: AC1-P7706 Office Hours: Wednesday11:00AM-12:00Noon 1 Course Description The fundamental objective of this course is to introduce to managers the important economic concepts and tools to improve their decision-making and to achieve managerial goals. The course will emphasize the economic way of thinking, and will enable managers to better understand the economic environment in which business decisions are made. Developing innovative solutions to business problems will be encouraged throughout the course. Learning Objectives Ø Apply the tools and theories from microeconomics to perform demand and supply analyses. Ø Identify different market structures. Formulate different pricing strategies under different market structures or consumer characteristics. Ø Apply basic game theoretic models to formulate business strategies such as pricing. Ø Understand...
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...Pregunta 1. Usando la información proporcionada sobre aluminio construya y estime la oferta de la Industria para el aluminio primario. Dado que cada planta tiene diferente tecnología dependiendo de su antigüedad y cada tecnología produce con un costo variable determinado, consideramos que la oferta total de la industria puede definirse en base al costo variable, ya que en este tipo de industria el precio es definido por el costo. Por lo que se estimo la oferta de la industria para el aluminio usando la siguiente especificación linear: Q = a + bPE + cPA + dOth + ePpf + fCo +gMA+ hLA + iFR + jGA Donde Q es la capacidad (tpy), PE el precio de la electricidad ($/kWh), PA el precio de la alúmina ($/t alúmina), Oth es el costo de otras materias primas, Ppf el costo de energía de la planta y combustibles, MA el costo de mantenimiento, FR el costo de fletes ,y GA los gastos generales y administrativos. Los resultados de la regresión son los siguientes: Regression Analysis R² 0.243 Adjusted R² 0.196 n 157 R 0.493 k 9 Std. Error 105.476 Dep. Var. Capacity (tpy) ANOVA table Source SS df MS F p-value Regression 524,369.3834 9 58,263.2648 5.24 3.53E-06 Residual 1,635,389.5142 147 11,125.0987 Total 2,159,758.8976 156 Regression output confidence interval variables coefficients std. error t (df=147) p-value 95% lower 95% upper Intercept...
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