Aluminum smelter in South Africa Essay

We recommend you do not build this new Greenfield firsthand aluminium smelter in South Africa. In order to achieve a 15% ROI on your coronation, you require a long-term average terms of $1500 for aluminum. We have estimated that necessary for primary aluminum in 5 years will be at $20bn, which will support a market value of nearly $1490.This heavily builds on the assumption that aluminum inventories will be zero in by that time, which depends on a successful implementation of the international memo of Understanding. Historic all(prenominal)y these non-binding agreements have been very hard to enforce, and so a scenario where put up is far greater than demand is likely, leading to large inventories and lower prices. It is because of this incredulity that we recommend you do not build the plant. Back-up calculations1.ROI calculation Given investment cost of $1.6bn, full capacity of 466,000 t/year and an ROI requirement of 15%, we calculated that you require a price of $1,500 per ton of aluminum.2.In the short run, all smelters need to cover variable costs, which include electricity, alumina, other material costs and freight cost. In the long haul, they need to cover total costs. a.The current price ($1,100) covers variable costs for 20 million tons of capacity the long-run price will have to be higher. b.Smelters may hesitate to subdue down production of individual pots, as this will still detect costs of labour or other non-material costs, as wellhead as additional costs in having to rebuild and reline the pots. c.Not all producers ar subject to the same pressures, e.g., variable costs differ significantly mingled with different smelters (different size, efficiency, tax breaks, power agreements). Government-run facilities may have more fiscal support due to their social role in addition to sensitive production, such as securing raw materials supply for domestic industries, as well as providing jobs for local communities.3.Given a CAGR of 2% per year, we estimate total aluminum demand to be 27 million tons in 1998. assuming that inventories are zero, and primary demand accounts for 74% of total supply, this would imply primary demand of 20 million tons.4.To produce 20 million tons, the price would be around $1,490 per ton. 5.The reduction in inventories and stabilization of the price level depends on the success of the MoU. Other producers may not look favourably on you opening a new smelter when they have had to brush off down on production.