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Transforming the Economics of the Marketplace
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Transforming the Economics of the Marketplace

14 May 2016

This article is a contextual think-piece summarising the potential impact the newly developed EnPot aluminium smelter technology could have on the economics of aluminium production, and our future global energy needs.

The EnPot technology has the potential to transform the economics of global primary aluminium production.

Background

In recent decades three factors have had a major influence on the economics of aluminium smelting, they are; supply and demand, the pursuit of marginal profits, and the influence of power generation prices.

The economics of supply and demand is underpinned by some basic fundamentals. When supply exceeds demand, then demand pressure falls, closely followed by price. As price falls, profit margins are squeezed to the point that the least efficient producers either cut back on their production, or leave the market altogether. This shrinks supply, and demand pressure rises, allowing prices to follow suit.

When demand exceeds supply, prices can rise and suppliers can enjoy increased margins and profits. Usually at that point the rising market has attracted new entrants and investment, which expands supply and the cycle starts again.

The current dynamics of the aluminium industry, with the inflexibility to adjust supply, makes it extremely difficult for the fundamentals of supply and demand to be applied.

Even short periods of oversupply can lead to stockpiling, which keeps prices depressed for a much longer period than the original oversupply.

With limited ability for smelters to back off from full production, one could argue that the aluminium industry is in fact being supported by its own stakeholders, somewhat counter-intuitively, to overproduce during times of low prices and keep prices depressed.

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