Primary Aluminum Demand

Topics: Supply and demand, Price point, Demand curve Pages: 2 (545 words) Published: February 12, 2012
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 levels (19.8 mtpy) with higher than 99% accuracy (predicted at 19.62 mtpy). Demand

To forecast world primary aluminum demand over the next 5 years, we first constructed a demand schedule for 1993 using real prices and quantities supplied based on historical data between 1988 and 1992 (Exhibit 3 and 4 in case). Keeping these prices constant, we predicted an overall increase in quantity demanded over the next 5 years based on an estimate of the growth of world consumption. We isolated demand...
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