Essays on the economics of the aluminium industry

Abstract: This thesis consists of an introduction and five self-contained papers all dealing with various aspects of the economics of aluminium markets and production. Paper I focuses on various efficiency issues within the global primary aluminium industry. Using Data Envelopment Analysis (DEA) and data for the year 2003, we find that in general primary aluminium smelters are efficient given the scale of operation. However, many smelters operate with increasing returns to scale. Thus, many smelters would lower their average costs if the scale of production was increased. Furthermore, there exist substantial allocative inefficiencies in the industry, i.e., smelters are inefficient in changing the factor set up according to market prices. Overall, there are significant variations in the level of efficiency across smelter locations. Finally, we estimate the potential for factor reductions across smelter technologies and locations. Paper II analyzes the development in total factor productivity (TFP) over the period 1993-2003 in the global primary aluminium industry using DEA. The Malmquist indices calculated show that with the exception of Western Europe, smelters in high cost regions have experienced rapid TFP-growth, mainly driven by technical progress and not (as a priori assumed) by efficiency improvements. In regions with rapid capacity build-up, TFP-change is found to be weaker but likewise driven mainly by technical change. Finally, we do not find support for the notion that the dispersion of different smelter technologies affects regional smelter performance. Using a Translog variable cost function model, Paper III examines the ex post factor substitution possibilities in the primary aluminium industry in Western Europe and the Africa-Middle East region (AME) for the period 1990-2003. The results indicate higher short-run own- and cross-price elasticities at smelters in the AME region than in Western Europe, at least when it comes to labour and electricity demand. The results also suggest that in both regions the demand for electricity has over time become less sensitive to short-run price changes, while the substitution possibilities between labour and material have increased but only in the AME-region. The liberalization of the Western European electricity markets in combination with the rigid labour markets in this part of the world suggest that the shift in production capacity from the western world to the AME-region as well as China may continue. Paper IV provides an econometric analysis of the determinants of short-run supply and demand in the Western European market for secondary aluminium for the period 1983-1997. The empirical results indicate both price inelastic demand and supply. Policies aimed at increasing aluminium recycling by manipulating price will thus be ineffective considering the low own-price elasticity of secondary supply. However, increased demand for better fuel efficiency and safety in cars might increase the demand for materials with a favourable strength to weight ratio, such as aluminium, thus potentially increasing the demand for secondary aluminium. Finally, Paper V extends the analyzes in Paper IV by; (a) explicitly modelling the interdependencies between the primary and the secondary aluminium markets; (b) estimating secondary aluminium supply in a Cobb-Douglas framework; and (c) modelling aluminium scrap generation. The econometric results indicate that the secondary industry acts like a price taker to the primary aluminium industry. Taking account of the dependencies between input and output prices in secondary aluminium production, we find inelastic supply responses, thus confirming the ineffectiveness of price-driven policies aimed at stimulating recycling. We further calculate a continuously growing stock of scrap. Increased availability of aluminium scrap raises the probability of secondary producers to find the wanted quality, thus lowering the cost of recycling. The impact on supply is however found to be small. Given that increased recycling probably must come from the stock, the lowresponsiveness of supply from increased scrap availability indicates that attempts to stimulate ‘mining' of the scrap stock may be costly.