INTERNATIONAL PRIMARY ALUMINUM COST MODELING: THE NATURE OF COMPETITIVE ADVANTAGE AND FOREIGN EXCHANGE SENSITIVITY (COMMODITY, DUMPING, PRICING, PREDATORY)
The primary aluminum industry has undergone structural change in the last decade: sharp cost increases, slower metal consumption, high pricing volatility with collapse of producer pricing system, and a growing presence of LDC Government producers. These events have been very unsettling for traditional producers which charge commodity exchange pricing with reflecting speculative sentiment rather than industry cost structure, and suspect LDC Government producers with social and foreign exchange concerns rather than profit motives. With these developments as background, we investigated the primary aluminum industry's cost structure and the nature of locational economic advantage. We set out to test three hypotheses: whether the commodity pricing system is divorced from the industry's cost structure, whether there are producers operating at prices below marginal costs, and whether there is evidence of subsidies to LDC Government producers at the operating cost level. We developed extensive data banks on each production facility in the non-communist primary aluminum industry; we built a computerized industry wide cost model using process analysis estimation methods, with individual cost profiles for each plant and an industry supply schedule. On the basis of our cost model we could not sustain the first two hypotheses: in the period of study prices settled very closely at the level necessary to cover marginal costs of the highest cost producer needed. There were no clear evidence of marginal costs subsidies in the LDC, and we could not sustain the third hypothesis. We tested further the industry's sensitivity to US currency fluctuations and found a high level of sensitivity: the cost gap between Western Europe ex-Scandinavia and the US appears to be mostly the product of US currency appreciation in the eighties. LDC producers, together with OECD low cost producers (e.g. Australia) were found to maintain their competitive position in the industry under sharply lower foreign exchange value of the US currency. At the operating cost level, LDC Government producers appear to command real economic advantage based on inexpensive labor and availability of natural resources. We find the much maligned pricing volatility to be more the product of the industry's remarkably steep operating cost curve, than the result of speculative trading on commodity exchanges.
Year of publication: |
1986-01-01
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Authors: | DUROC-DANNER, BERNARD JACQUES |
Publisher: |
ScholarlyCommons |
Saved in:
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