Econ200(f2) – Fall 2008 Lemberg – IBS

Nabeela Alam Brandeis University

Case Analysis #1
Part (2)

(Due: Thursday, November 13th, 2008)

DIRECTIONS: Work in your designated groups. This assignment is due via email by 1 pm.
Note that I can Please submit ONE copy per group. Remember to put down the NAMES of
ALL your group members.

FORMATTING INSTRUCTIONS: Do NOT exceed 2 pages of single spaced, 11 point font in

Times New Roman for the summary itself. Number and include any additional tables, charts and
graphs in Appendix 1. Reference and show your calculations in Appendix 2. See Sample
attached.

Part (2)

You already read and analyzed the case titled Alusaf Hillside Project (HBS 9-704-458).

After the class discussion, you may choose to revise your initial assessment. Please
submit an executive summary of your analysis and decision. Support your analysis with
relevant numbers. Your executive summary should flow like a continuous but brief
report that you will be presenting to your CEO perhaps. Begin by presenting the
problem. Use the questions below as a guideline for content and structure. (In other
words, don’t divide your summary into parts numbered 1-5, each an answer to a question
below.) You may also embed other frameworks (such as a SWOT analyis) into your
work.

You will be graded on:

Relevance of content 25%

Use of microeconomic concepts 25%
Clarity 25%
Presentation and formatting 25%

The five broad questions are the same as in Part (1). In addition I have included details
that I want to bring to your attention that we may not have discussed in class. You may
choose to use or ignore the additional information as you see fit.

You should also feel free to use different numbers or measures if you think they give
more accurate predictions. You may also use outside sources to assess the market
conditions for aluminium in 1993, but use data only from the case and dataset.
1. Is aluminium production an attractive industry? Why or why not?

(i) Is the technology different across firms?

(ii) Are the costs same across the companies? If not, why do they vary across
firms? Where are the cost savings? (Look at the smelter dataset)

2. Using information from the case and data from the spreadsheet provided,
construct the industry supply curve for primary aluminium.

(i) Recall our discussion on the anomaly between production figure in 1993
given in Exhibit 4 and the capacity you find on the supply curve at the
prevailing 1993 price. Why is there a mismatch?
(ii) Create another industry supply curve using the following steps
1. Delete the cumulative capacity measure you calculated before.
2. Sort your dataset according to “Company”
3. Select all the “STATE” companies and move them to the beginning of
the dataset.
4. Sort the STATE companies according to Total Variable Costs
5. Sort the remaining companies according to Total Variable Costs.
6. Find the cumulative capacity as before (across ALL companies)
7. Graph the industry supply curve.
(iii)How is this second industry supply curve different? Why are we using this?
(iv)Can we explain total production in 1993 using this second supply curve?
(v) Exhibit 3 indicates that price of aluminium is very cyclical – more than 2.5
times swings over four year periods. Look at the supply curve to see when
prices are really high. So what determines high prices?

3. At what rate do you expect primary aluminium demand to grow over the coming
years? (Be sure not to confuse total aluminium demand with primary aluminium
demand; primary aluminium demand is total demand less scrap production.)

(i) We can use the CAGR to project demand from the 1993 consumption figures.
But remember this is total demand, not just for primary demand. You have
other numbers in the exhibit that should help you figure out what primary
demand should be.

Someone commented in class that the CAGR is not a good enough measure of
what demand will be. I welcome you to come up with a more accurate
measure from the data you are given in the case. If not, you can choose frm
the 5 or 10 year CAGR, but you have to justify why you choose one or the
other. Note that the “A” in CAGR stands for annual. So it gives us the
annual growth rate, calculated from the past 10 years. Here is the calculation
for 10 year CAGR for consumption in the Western world provided to you in
Exhibit 3:
 1
 20.4  10
   1  0.0326  3.3% per year
 14.8 

I can simply use this annual growth rate to project demand in 5 years:
1.0335 (20.4)  24m tons

4. What do you expect the price of alumnium to be in 5 years? in10 years?

The demand analysis above along with your industry supply curve should help
you pinpoint the price.

Also, in the long run, do you expect demand to be pushing prices up or do you
expect it to be the average cost of the incremental shelter?

5. Should Alusaf build the proposed Hillside smelter? Is your recommendation

particularly sensitive to any assumptions you have made?

Think about how you can play round with the numbers you have to get different
price projections. What range of ROA (return on assets) are you considering?
What are the different scenarios for capital costs?