The book is about the declining market of the aluminium industry in the US. Many companies have been forced to adopt alternative strategies in a bid to save their companies from possible losses. BHP Biliton is one such company, which is facing an imminent crisis in its aluminium department. The company has responded by closing down some of its mines in South Africa and is contemplating selling other outlets. The decline in the market of aluminium in the US is attributed to the rising industry in China. The Chinese market is growing with cheap aluminium products, and this is putting a strain on other markets. The growing of the Chinese market is attributed to its access to cheap labour and advanced mining technology. This has enabled the Chinese to produce more aluminium, and this has had the effect of increasing supply and leading to a subsequent decrease in the price. The western countries, including Australia, are also facing hardship because of the taxes it pays for the carbon emission. This has further increased costs of the western companies leading to a subsequent decrease in profits.
Economic Concepts Applicable and Their Analysis
The economic concepts, which I will tackle, are demand and supply. These two concepts have a remarkable effect on the price of a commodity and hence the wellbeing of various companies in trade. In the current situation, the companies are facing hardship because of the increase of the supply of the commodity. This increase in supply is also contributed to by a number of factors, which will be discussed in the analysis. The demand of the commodity is also on the increase, but it is comparatively lower than the supply, and this is the reason, why it is not having a positive impact on the price.
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Supply of the commodity is the rate at which the product is brought to the market. Supply of a commodity will have a profound impact on the price at which the commodity will be sold. In the present scenario, what we are analyzing is the supply of aluminium, both in China and the US, and the effects this has had on the price of the aluminium.
Supply price is the price with which goods will be sold in the market or the price the sellers will be willing to sell the goods. This is contrasted with the demand price because demand price is mostly controlled by the buyer. Supply price will be affected by a number of factors. One of the factors which affect the price of the supply is the production costs. A company can only sell its goods willingly to the point at which they will not make a loss. The supply price of aluminium will not go below the price at which the company spent to mine and refine the metal. The reason some of the aluminium companies are closing is because they cannot sell below the point they are and still be in profitable business.
The prices of factors of production will also affect the amount of goods supplied in the market. This is because the higher the price of production, the lower the amount of goods which will be supplied. Factors of production are inputs such as labour and materials which are necessary to produce the output. If the prices of the factors of production increase, this will result in the increase of the production costs, as well. This will make the producers sell their goods at a higher price so as to recover the production costs and make a little profit. This leads to the amount of goods supplied to be lower. The supply of aluminium is on the increase in the Chinese markets because the factors of production are cheaper. In China, industries are taking advantage of the cheap, available labour. This has enabled it produce more aluminium compared to their counterparts in the US and South Africa.
The prices of related goods will affect the amount of goods supplied because this will have an effect on competition. When the prices of related goods are lower, the competition will be high and the goods supplied will decrease. This is because the suppliers are not certain that all the goods in their disposal will be sold. When goods are not sold for some time, they may depreciate in value due to obsoleteness. However, this is not a crucial factor in the metal industry because every metal is unique in its own way. The intrinsic value of each metal is unique.
The number of suppliers will also have an effect on the amount of goods supplied and the supply price. This is also attributed to competition in that the higher the number of suppliers the higher the competition. With an increase in competition, the suppliers will each try to reduce the price of his commodity to make it attractive. Higher number of suppliers, therefore, will lead to a lower supply price and vice versa. The quantity of goods supplied will also decrease, and this is because each supplier will be producing what they think they will sell to avoid any obsolete or dead stock. In the aluminium industry, the production of the resource by an individual company, in the US, is on the decrease because they are cautious of the amount of aluminium produced in China and the profound effect it would have on its markets.
Technology will also have an effect on the price and the amount of goods supplied. This is because the higher the technology, the more and the cheaper will be the goods produced. With automation and use of high technology machines when mining, the company can mine more minerals at a lower cost. This means that the efficiency of mining increases and the company is also able to mine high quality metal. The result, moreover, will be the supply of more commodities at a lower price. This is what is happening in Chinese aluminium mining industries, and they are able to produce high quality aluminium at relatively lower costs. Because they spend less to mine the aluminium, they can afford to sell the aluminium at lower prices without making loses. This has had a negative impact on the US companies, which produce aluminium at relatively higher costs than the Chinese companies. That is why some companies, like Alcoa, are considering reconstruction strategies.
The expected future prices will affect the amount of supply because it will dictate what the suppliers are ready to release to the market. When the suppliers are anticipating a price increase, they will hoard their commodities so as to sell when the price increase and vice versa. This has also had an impact in the aluminium market. The US industries do not know what the future holds for them in light of the Chinese markets. This has forced the companies to sell their products at a lower price because the price in the future could be lower than that. The companies have also reacted by selling off their assets and consolidating the aluminium industry with other related industries. This is geared towards cost reduction and avoiding any possible future loses.
Demand elasticity is the degree of responsiveness of the demand of a commodity in relation to change in price of the commodity. Changes in demand usually move in opposite directions with the change in price such that when the price increases the demand reduces and vice versa. An example is when the price of aluminium decreases, the demand of the commodity rises. The slight increase in demand noted in the aluminium market can be attributed to drop in price of the commodity.
The cross price demand elasticity is the relative change of demand of one commodity when the price of one commodity changes. Substitutes are those commodities, which can be used in place of each other. A change in price of one substitute will lead to an opposite change of the demand of the other substitute. The cross price demand elasticity for substitutes is always positive. As for complements i.e. those commodities usually used together, a relative change in price of one will lead to a similar change in demand for the complement. The cross price demand elasticity for complements is negative. However in the present scenario, there is no substitute or complement, which has come in the way of the aluminium industry. Metals hardly have substitutes for the clear reason that they are unique in their own ways.
Income demand elasticity is the relative change of demand of a commodity compared to a change of the income of the consumer. Positive change of income of a consumer usually leads to a positive change of demand for a normal good while a decrease of income leads to a decrease of demand. An inferior good is that which the demand decreases with an increase in the income of the consumer. The demand elasticity of an inferior commodity decreases when the earnings of the consumer increase. In this case, the consumer income has been affected by the value of the dollar, which has been losing value at a slow rate. This means that the consumer has less to spend on luxuries and leads to a decrease in demand of the commodity. The small notable increase in demand of the aluminium is because of the decrease in price of the commodity. Had there been no decrease in the prices of aluminium, the demand would be much lower.
When the price of a certain commodity is expected to increase, the demand will increase. This is because the consumers will be trying to avoid paying higher prices in the future by buying as much as they can at that moment. Even when the price of goods increase and the consumers expect a further increase, the demand will increase regardless of the price increase. Consequently when prices are expected to decrease, there will be a reluctance of the customers to purchase because they know that a slight delay on their side will lead them to save on purchases. This is what the consumers of aluminium are doing; postponing their purchases in case prices will reduce further.
When the population of a place is high, demand of a commodity will be higher than the demand in a place where the population of people is low. The reasoning behind this is that, with an increase in population, everybody wants to have commodity. However, the demand will keep fluctuating as the needs of different categories of people change with age. In China, there is a considerably higher population, and this has contributed to a higher demand of aluminium in the country and, thereby, making it possible for the producers to sell at relatively lower prices. This has drastically affected other non Chinese industries.
Consumer preference is another factor, which has a significant influence in the demand. When the consumers have a preference for a certain good, the demand for such a goods go up and vice versa. However, the consumer preference is something which is particularly unpredictable, and it may change at an instant. Consumer preference will be affected by issues like the introduction of substitutes into the market. An example is when consumers start preferring other metals other than aluminium for no apparent reason. This could be one of the reasons why the aluminium market is plunging downwards.
The aluminium industry was doing remarkably well just like the market of other metals. However, a rise in the Chinese industries has led to the decline in the aluminium market in the US and Australia. Industry giants, like Alcoa, are practicing downsizing strategies and other remedial measures in a bid to stay in the market. Mines have been closed and assets sold. The reasoning behind this is that the supply of the commodity has increased and drove the prices downwards.The increase in supply from the Chinese markets is contributed to by the cheap and efficient technology harboured in the Chinese markets, as well as affordable factors of production. The increase in supply has reduced the price of the commodity, and this has resulted to some companies in the US and Australia doing badly. The Chinese are not affected because they produce the metal at cheaper costs and can withstand lower prices. The Chinese also pay lower taxes for their profits as compared to their western counterparts. The west can increase their efficiency by adopting the new technology and pushing the government to obtain tax concessions.
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