Question

1.Refer to the article on Alcan in Appendix [1]. Assume that thecapacityof smelters (aluminum plants) shapes thesupply curve, and that theproductionlevels of those smelters generates thequantity supplied.

a.The graph in Appendix [2] represents some of what has been happening in the industry at the time of the article. Answer the following questions about this graph:

i.What do D1 and D2 illustrate and why?

ii.What does Q1 represent?

iii.After the shift to D2, what price would be required to sell the original amount of planned production (Q1)?

iv.What part of the graph illustrates the "over-supply" or "glut" that the article refers to?

Appendix [3] shows the global supply curve for crude oil that we used in class. Imagine we used the Alcan article to create a similar type of supply curve for global aluminum production. Given the production decisions that the article discusses, draw an aluminum supply curve that identifies the approximate location of the following producers: Alcan's closing smelters; the newly built smelters in Quebec; and the Soviet smelters.

Alcan Closes Three Smelters in Quebec, One in U.K: Announcement Sends Aluminum Prices Up

Excerpted fromTheGlobe and Mail. By Barrie McKenna

MONTREAL Alcan Aluminium Ltd. announced shutdowns yesterday at four of its smelters three in Quebec and one in Britain despite repeated assertions that it would maintain production in the face of a mounting world glut of aluminum and tumbling prices.

The Montreal-based aluminum giant will reduce its worldwide production by 8.5 per cent, putting 500 employeestemporarily out of work. About 200 workers in Quebec will be affected by the shutdowns, slated for November and December.

"At current prices we just could not justify operation of these smelters," Alcan spokesman Jacques Dubuc said yesterday. "It is money out of our pockets every time we produce a pound of aluminum."

The shutdowns surprised many analysts because the company's smelters particularly those in Quebec rank among the world's lowest-cost producers. Alcan generates nearly all its own hydroelectric power in Quebec, allowing it to run older and less efficient smelters profitably.

However, Mr. Dubuc said Alcan's reservoirs for the hydro power are now half to three-quarters full, and the company has to buy power from Hydro-Qubec just to maintain production.

"We are stuck with a lack of energy," Mr. Dubuc said. "It does not make sense to buy from Hydro."

Yesterday's announcement did what months of talk could not do: boost aluminum prices. Alcan, along with all other producers, stands to gain handsomely.

The cash price of aluminum, stuck at its lowest level [in 6 years], jumped 10 per cent to about $1,232 (U.S.) a tonne, or about 55 cents a pound, on world metal markets yesterday.

Analysts say aluminum prices will rebound even further in coming weeks and months as more production is idled around the world, drying up the current surplus. Alcan's stock also got a lift, rising $1.37 to $24.25 on the Toronto Stock Exchange. ...

The production cuts by Alcan should help avert a looming oversupply for [next year], said David Moison, director of light metals at Resource Strategies Inc. in Exton, Pa. Alcan's shutdowns, added to recent production cuts at smelters in Europe and India, will take about 600,000 tonnes out of commission, he said. ...

Annual production outside the Communist bloc totals about 15 million tonnes. But demand, depressed by weak auto and construction markets, is only running about 14.3 million tonnes. Adding to the glut is an estimated 600,000 tonnes of aluminum from the Soviet Union as it attempts to rebuild its economy.

[Starting two years ago], four major new smelters or expansion projects have gone ahead in Quebec, lured by cheap and apparently abundant electricity. Of those already open, none has announced production cuts. The building boom will double Quebec's share of world production to more than 12 per cent within 4 years. ...

The smelters affected are the Shawinigan Works in Shawinigan, Que. (21,000 tonnes); Isle-Maligne Works in Alma, Que. (24,500 tonnes); Arvida Works in Jonquire, Que. (22,000 tonnes); and Lynmouth Works in Britain (66,000 tonnes).

The company will not say how long the cutbacks will last. Alcan operates 14 smelters worldwide.

Last Friday, Alcan announced a meagre third-quarter profit of $6million, a 94-per-cent drop from the year-earlier period. Revenue was $1.95-billion, down from $2.2-billion last year.

D1 D2 Price S P1 P2 P3 0 Q3 Q2 Q1 Quantity (= 15.6 million tons)