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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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