Case study

Words 900

The aluminum market is on a world scale basis around 18 million tonnes. The price of aluminum is volatile both in the spot market and on terminal contracts. In 1994 the price per ton was $1,110 in 1993 the average price was low, 1140 USD, and in 1988 the average price was 2540 USD. The aluminum market can be explained as a market where an almost continuous flow of aluminum pours into the market while the requirement for this steady flow is rather volatile due to cyclical behavior of the three main end-uses; transport, packaging, and construction. As in other commodity markets, the price of aluminum is decided at commodity exchanges primarily at the London Metal Exchange. The equilibrium between supply and demand is the main factor behind the price development. The supply side is fairly deterministic with open information on a current production level and future capacity changes. The demand side, however, is determined by the activity in the main markets for aluminum and also by the comparative price of aluminum substitutes.

The aluminum price graph has a negative slope when constant dollar price is analyzed. The aluminum price is nonstationary but with a downward trend. In the long run the demand changes to price changes, but in the short run, changes are mainly adjusted to movement in the segment and the error correction mechanism. The recent method for an upward price adjustment in the aluminum market is to reduce the produced quantity as was done in 1994. In the long run, however, a maintained a high level of prices will probably reduce the demand for aluminum.

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