...Aluminum Industry in 1994: Long Run Supply and Equilibrium Managerial Economics Alp Atakan This material is for the exclusive use in MGEC classes at Koc University. No other use is allowed without my permission. 1 Road Map • • Why is the price of Aluminum so Volatile? • Demand analysis Long-Run Supply Curve – – – – – Difference between short-run and long-run supply curves ATC and the exit price FR-ATC and the entry price Building the long-run supply curve What drives the long-run price path in a commodity market? 2 Demand Curve Answers the Question: What Quantity Will be Demanded at Different Possible Market Prices? Movements along a given demand curve tell us how quan4ty demanded changes with respect to changes in the good’s price P0 Price ($ per unit) P0 Shi7s in the demand curve tell us how quan4ty demanded changes with respect to changes in demand drivers other than the good’s price (e.g, income) P1 D X0 X1 Quan?ty (units per period) X0 X2 D0 D1 Measure of sensi4vity: price elas:city of demand % QD = % P QD /QD dQD P = ⇥ D P/P dP Q % QD = % Y Measure of sensi4vity: other elas:ci:es ...
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...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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...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 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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...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 reached 19,412 thousands...
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...112 Innovación, Tema: Actitudes y la satisfacción laboral Primero tienes que volverse un líder, un Cuando se realiza el trabajo con psicólogos sociales y se busca como cambiar patrones de conducta y actitudes, descubren que las características del peruano en términos generales es que se caracteriza por su baja autoestima y de forma colectiva, el peruano se siente siempre menos. Entonces cuando tú le das la importancia a la persona y la valoras y sobre todo cuando es alguien que ellos consideran que es muy por encima de ellos, le dice tu eres igual que yo, en el acto su autoestima se levante y eso genera un actitud muy positiva en la gente y quieren mantenerse en ese nivel y es lo que hicimos cuando decidimos cambiar una empresa que faltaban, robaban, el ausentismo era brutal los lunes y los días de semana el ausentismo era del 20%, una empresa quebrada que necesitaba todo tu personal es imposible que opere con normalidad de esa maneram, entonces para tener una empresa eficiente donde la gente no robe que se sienta parte de la organización que no falle a su empresa y se ponga la camiseta había que buscar psicológicamente de que resorte se tenían que ajustar para que sean y se sientan parte del sistema y tomando en consideración que el peruano por historia se rodea del poder, y timando en consideración que la mayoría de trabajadores de Sider son de origen alto-andino, se pegan al poder desde la época de los incas y la conquitsa, la gente se aglutinaba a la gente de poder...
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...Estimating the Elasticity of Demand for Gasoline Professor Pushan Dutt The graph below shows the evolution of the price of oil (adjusted for inflation) since 1957. Note a couple of sharp jumps and collapses in the price of oil. 1. 2. 3. 1973: : 2.75 % of global production was withheld; Prices in nominal terms jumped from $3.5 a barrel to $10 a barrel 1979: 5.68 % of global production withheld; Prices in nominal terms jumped from $15 to $32 a barrel. 2007: Oil prices increase from $60 to reach a peak of $128, followed by a rapid collapse Why do we observe such sharp swings in oil prices? The answer lies in the elasticity of demand and supply. For this exercise we will focus on the demand side and estimate the price elasticity of demand for oil. We will focus on the US and use time-series data to estimate this demand function. Here are the somewhat modest goals of the assignment: 1. To convince you that demand functions and elasticities are measurable, rather than purely abstract concepts. 2. To provide practice in manipulating and interpreting demand functions particularly constant-elasticity demand functions 3. To motivate your study of linear regression in UDJ by providing an example of an application. I will lead you through the steps without explaining the statistical methods of regression. Such methods are not part of this course but you will see them in detail in your UDJ core course. © INSEAD Step 1: Write a Model The first, and perhaps...
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...Aluminum Industry in 1994: Long Run Supply and Equilibrium Managerial Economics Alp Atakan This material is for the exclusive use in MGEC classes at Koc University. No other use is allowed without my permission. 1 Road Map • • Why is the price of Aluminum so Volatile? • Demand analysis Long-Run Supply Curve – – – – – Difference between short-run and long-run supply curves ATC and the exit price FR-ATC and the entry price Building the long-run supply curve What drives the long-run price path in a commodity market? 2 Demand Curve Answers the Question: What Quantity Will be Demanded at Different Possible Market Prices? Movements along a given demand curve tell us how quan4ty demanded changes with respect to changes in the good’s price Price ($ per unit) P0 Shi7s in the demand curve tell us how quan4ty demanded changes with respect to changes in demand drivers other than the good’s price (e.g, income) P0 P1 D0 D X0 X1 Quan?ty (units per period) Measure of sensi4vity: price elas:city of demand % QD = % P QD /QD dQD P = ⇥ D P/P dP Q X0 X2 D1 Quan?ty (units...
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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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...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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...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 for removal...
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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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...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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...1. Introduction: In June 1997, board of the International Finance Corporation (IFC) 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...
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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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