THE ALUMINUM INDUSTRY: PERSPECTIVE

To produce aluminum, alumina (AI,O,), a fine white powder, is dissolved in a cryolite bath. Carbon anodes are then inserted into this solution, and the aluminum is separated from its very strong bond with the oxygen using an electrolytic process. The value of industry shipments of primary aluminum in 1994 was $4.8 billion, a large decrease from a recent high of $6.9 billion in 1989. From 1992 to 1994, this industry, which constitutes 0.1 percent of consumption expenditures, experienced an average growth rate of -2.6 percent as

measured in value of shipments, compared to

the all-industry average of 4.2 percent. This growth rate of the dollar value of shipments must be considered in light of the rapid increase in the price of the product, with price increasing by an average of 14 percent per year during the 1992 to 1995 period. Thus, aluminum quantity produced decreased at even a faster rate. The primary aluminum industry is fairly concentrated, with the largest 8 companies accounting for 82 percent of the value of shipments.

Compared to the manufacturing average of 12 thousand British thermal units (btus) of energy used per dollar of value added, the primary aluminum industry is among the most energyintensive of the major industries, using 155 quadrillion btus per dollar of output. Electricity is still the predominant fuels, with the generation of that electricity hydropower-based for the industry in the Pacific Northwest and coal

New capital expenditures for primary aluminum were about $120.7 million in 1994, or 0.1 percent of all new capital investment for the manufacturing sectors. Of this total, $103.6 million was for machinery and equipment and $17.1 million for buildings and structures.

Of the total of approximately 123 million civilians employed in the U.S. in 1994, 18.3 million were employed in manufacturing. A total of 18,500) were employed in primary aluminum, a substantial decrease from the 1992 level of 20,400. Approximately three-fourths, or 13,900 of the 1994 employees, were production workers.

THE ALUMINUM INDUSTRY

1. SUMMARY OF NOLAN RICHARDS' PAPER

Overview

The aluminum market is a world market, with primary aluminum ingot trading on the London Metal Exchange (LME) at a price of around $1575 to $1650 per ton. In the base case of no new environmentally-driven constraints on aluminum production, Nolan Richards states that " ... practically all new alumina reduction plants will be built in developing countries ...", with the only exceptions being a few developed countries with access to low cost hydro power. Since U.S. primary producers will also be limited to areas with low cost hydro power, a policy that significantly raises electricity prices would call into question the ability of U.S. producers to maintain a dominant share in the domestic market.

The aluminum industry in the U.S. purchases electricity at approximately half the price of other industries, primarily because of its use of hydro power. The effects of the assumed fuel price adders on this industry depend on the future structure of the electricity market and the degree to which the assumed fuel price adders were applied.

If the fuel price adders were only half as large for aluminum as for other industries, Richards estimates that the operating cost increases for aluminum production would be $254 and $127 per tonne under the two assumed fuel price scenarios. These cost increases would lead to a loss of profits of about $12 billion for both the USA and OECD-Europe through 2015. The least competitive plants in the U.S. and in Europe would close, which would reduce capacity in these regions by about 20 percent and 8 percent respectively.

If the aluminum industry were subject to the same fuel price adders as the industry average, the effects on the aluminum industry would be more adverse. Richards estimates that, in this case, the fuel price adders would increase the cost of aluminum by $473 per tonne in Scenario 1 and $314 per tonne in Scenario 2. With these cost increases, the domestic industry could not compete with developing countries that can produce aluminum in the $1,300 to $1,550 range. Under this assumption, Richards concludes:

the revised economics would cause all of the US capacity to be noncompetitive by 2010 and virtually all of OECD-Europe except that in Canada, Iceland and Norway... The loss of employment would be about 23,000 directly from the aluminum smelters.

Primary aluminum capacity in the U.S. is competitive in the domestic market because the