Essays on the Economics of the Aluminium Industry
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2007:06 DOCTORAL T H E SI S Essays on the Economics of the Aluminium Industry Jerry Blomberg Luleå University of Technology Department of Business Administration and Social Sciences Division of Economics Unit 2007:06|: 02-544|: - -- 07⁄6 -- Essays on the Economics of the Aluminium Industry Jerry Blomberg Economics Unit Luleå University of Technology Department of Business Administration and Social Sciences SE-971 87 Luleå, Sweden Abstract This thesis consists of an introduction and five self-contained papers all dealing with various aspects of the economics of aluminium markets and production. Paper I focuses on various efficiency issues within the global primary aluminium industry. Using Data Envelopment Analysis (DEA) and data for the year 2003, we find that in general primary aluminium smelters are efficient given the scale of operation. However, many smelters operate with increasing returns to scale. Thus, many smelters would lower their average costs if the scale of production was increased. Furthermore, there exist substantial allocative inefficiencies in the industry, i.e., smelters are inefficient in changing the factor set up according to market prices. Overall, there are significant variations in the level of efficiency across smelter locations. Finally, we estimate the potential for factor reductions across smelter technologies and locations. Paper II analyzes the development in total factor productivity (TFP) over the period 1993-2003 in the global primary aluminium industry using DEA. The Malmquist indices calculated show that with the exception of Western Europe, smelters in high cost regions have experienced rapid TFP-growth, mainly driven by technical progress and not (as a priori assumed) by efficiency improvements. In regions with rapid capacity build-up, TFP- change is found to be weaker but likewise driven mainly by technical change. Finally, we do not find support for the notion that the dispersion of different smelter technologies affects regional smelter performance. Using a Translog variable cost function model, Paper III examines the ex post factor substitution possibilities in the primary aluminium industry in Western Europe and the Africa-Middle East region (AME) for the period 1990-2003. The results indicate higher short-run own- and cross-price elasticities at smelters in the AME region than in Western Europe, at least when it comes to labour and electricity demand. The results also suggest that in both regions the demand for electricity has over time become less sensitive to short-run price changes, while the substitution possibilities between labour and material have increased but only in the AME-region. The liberalization of the Western European electricity markets in combination with the rigid labour markets in this part of the world suggest that the shift in production capacity from the western world to the AME-region as well as China may continue. Paper IV provides an econometric analysis of the determinants of short-run supply and demand in the Western European market for secondary aluminium for the period 1983-1997. The empirical results indicate both price inelastic demand and supply. Policies aimed at increasing aluminium recycling by manipulating price will thus be ineffective considering the low own-price elasticity of secondary supply. However, increased demand for better fuel efficiency and safety in cars might increase the demand for materials with a favourable strength to weight ratio, such as aluminium, thus potentially increasing the demand for secondary aluminium. Finally, Paper V extends the analyzes in Paper IV by; (a) explicitly modelling the interdependencies between the primary and the secondary aluminium markets; (b) estimating secondary aluminium supply in a Cobb- Douglas framework; and (c) modelling aluminium scrap generation. The econometric results indicate that the secondary industry acts like a price taker to the primary aluminium industry. Taking account of the dependencies between input and output prices in secondary aluminium production, we find inelastic supply responses, thus confirming the ineffectiveness of price- driven policies aimed at stimulating recycling. We further calculate a continuously growing stock of scrap. Increased availability of aluminium scrap raises the probability of secondary producers to find the wanted quality, thus lowering the cost of recycling. The impact on supply is however found to be small. Given that increased recycling probably must come from the stock, the low responsiveness of supply from increased scrap availability indicates that attempts to stimulate ‘mining’ of the scrap stock may be costly. i To Åsa, William and Alva List of Papers This thesis contains an introduction and the following papers: Paper [I]: Blomberg, J. and B. Jonsson (2007). Calculating and Decomposing the Sources of Inefficiency within the Global Primary Aluminium Smelting Industry – A Data Envelopment Approach. Paper [II]: Blomberg, J. and B. Jonsson (2007). Regional Differences in Productivity Growth in the Primary Aluminium Industry. Paper [III]: Blomberg, J. and P. Söderholm (2007). Factor Demand Flexibility in the Primary Aluminium Industry: Evidence from Stagnating and Expanding Regions. Paper [IV]: Blomberg, J. and S. Hellmer (2000). Short-run Demand and Supply Elasticities in the West European Market for Secondary Aluminium. Resources Policy. Vol. 26. pp 39-50. (Reprinted with permission from Elsevier). Paper [V]: Blomberg, J. (2000). Economic Models of Secondary Aluminium Pricing and Supply. (An earlier version of this paper was published in the conference proceedings volume of the “Recycling and Waste Treatment in Mineral and Metal Processing: Technical and Economic Aspects” conference, Luleå, Sweden, 16-20 June 2002). v Acknowledgements More than a decade ago – I believe it was early spring time – I took a bus trip that, as it turned out, would impact my academic career greatly. During the trip, Professor Marian Radetzki asked me if I was interested in becoming a Ph.D. student in economics at Luleå University of Technology. He even gave me a choice of topics; Russian coal or metal recycling. After some profound soul searching I picked the latter topic – in reality mostly because I thought studying Russian coal mining sounded somewhat dreary and depressing. With the benefit of hindsight, I now know that explaining to a non-economist (and probably most economists too) why focusing on aluminium markets is much more fun than Russian coal is difficult. And still, after many and long detours, I have finally reached the final destination of that bus trip, and you now hold the result in your hands. So, read on and have fun!1 Over the years, many individuals have provided invaluable advice, assistance and help without which this thesis never would have been completed. Marian Radetzki, aside from all the constructive criticism and supervision, most likely did wear out several pairs of good shoes kicking me “in the butt” to make me complete my Licentiate thesis, which today makes up parts of this thesis. Stefan Hellmer accompanied me in my travels searching for data, and taught me the value of “getting my fingers dirty” with the data and stop reading obscure journal papers. In the latter parts of my attempts to get me a Ph.D. degree, Patrik Söderholm and Bo Jonsson have had pivotal importance. Patrik has the eye of an experienced general for what can, need and should be done to overcome and prevail (i.e., to wrap up this thesis). Beside this, he has a (in my case much needed) gift and patience for language editing.2 Bo, however packed his schedule ever was, always found time to explain for me for the umpteen time how some particular issue in DEA work or do not work. And even more importantly, he helped me with that big, glowing thing residing on my office desk (I believe they call it a computer). Furthermore, I wish to thank all the past and present members of the International Advisory Board who assist the research at the Economics Unit and who all have provided invaluable advice in one way or another. They are; Professor Chris Gilbert, University of Trento, Professor John Tilton, Colorado School of Mines, Professor James Griffin, Texas A & M University, the late Professor David Pearce, University College London, David 1 Be forewarned though; Professor Radetzki once remarked at a seminar treating the first paper in this thesis that it looked like “a solid paper, but OOOHHH so dull”. 2 Even this particular sentence needed editing! vii Humphreys, formerly at Rio Tinto Ltd, Professor Ernst Berndt, MIT and Professor Thorvaldur Gylfasson, University of Iceland. Here I also would like to take the opportunity to thank Professor Christian Azar, Chalmers University of Technology, who served as the discussant at my Licentiate seminar, and Professor Lennart Hjalmarsson, Gothenburg University, who provided invaluable comments at my trial thesis defense. Of course there are also all the past and present colleagues at the Economics Unit. Thank you; Anna C, Anna D, Anna G-K, Anna K-R, Kristina, Christer, Robert, Linda, Olle, Thomas S, Thomas E, Mats, Eva, Fredrik, Gerd, Berith and Åsa. Not only have you provided constructive criticism and ideas for my research, but perhaps even more importantly, you have all contributed in making this workplace a place where I enjoy working. A special thank you to Staffan J, who once every fall opens up his sports cabin to feed (the enlightened parts) of the Economics Unit dumplings made from moose blood, with boiled liver and