Project: South African Aluminum Essay

At the beginning of 1994. Alusaf was sing constructing the world’s largest greenfield primary aluminium smelter. a 466. 000-ton-per-year smelter at Richard’s Bay. a deepwater port on the east seashore of South Africa’s state of Kwa-Zulu Natal. Alusaf was the exclusive primary aluminium manufacturer in South Africa. runing 170. 000 tpy of capacity at the bing “Bayside” installation at Richard’s Bay. Alusaf’s 1993 grosss were $ 220. 2 million. up 1 % from 1992. Income was $ 8. 6 million. up 122 % from 1992. A feasibleness survey for the proposed “Hillside” smelter had been completed over the past two old ages.

During this clip. South Africa’s political government had undergone a dramatic transmutation with the 1993 passing of the Transitional Executive Council ( TEC ) Bill. This measure removed absolute power from the custodies of Whites and created a multi-racial organic structure that would portion duty for forming and supervising the general elections to be held in April 1994. Within yearss. Nelson Mandela. leader of the African National Congress party. addressed the UN Special Committee Against Apartheid in New York. naming on the international community to raise countenances against South Africa.

The European Union. the Organization of African Unity. Canada. China. Sweden. Singapore. India. and the United States all responded rapidly with proclamations that they would get down the procedure of reconstructing normal economic dealingss with South Africa. Aluminum monetary values had fallen dramatically since the feasibleness survey was begun. as Russian aluminium continued to deluge the market. Now. with aluminium monetary values near their all-time low in existent footings in early 1994. Alusaf had to make up one’s mind whether to ship on this monolithic undertaking.

The South African Aluminum Industry The South African aluminium industry’s beginnings could be traced to investings made by Alcan in the fortiess. As portion of its attempts to make demand for its metal bar. Alcan built semifabrication capacity in South Africa to function the local market. A government-coordinated development attempt at the port of Richard’s Bay. together with a desire to cut down dependance on imported metal bar. led to building of South Africa’s first primary production installation about 25 old ages subsequently.

The original Bayside works came onstream in 1972 with ________________________________________________________________________________________________________________ Professor Kenneth S. Corts prepared this instance as the footing for category treatment instead than to exemplify either effectual or uneffective handling of an administrative state of affairs. Copyright © 2002 President and Fellows of Harvard College. To order transcripts or bespeak permission to reproduce stuffs. name 1-800-545-7685. write Harvard Business School Publishing. Boston. MA 02163. or travel to http: //www.

hbsp. Harvard University. edu. No portion of this publication may be reproduced. stored in a retrieval system. used in a spreadsheet. or transmitted in any signifier or by any means—electronic. mechanical. run offing. entering. or otherwise—without the permission of Harvard Business School. This papers is authorized for usage merely in PGDM 1st Year – 1007 by Rakhi Singh at IILM Institute for Business and Management. Gurgaon ( IILM-IBM. Gurgaon ) from October 2013 to April 2014. 799-130 Aluminum Smelting in South Africa: Alusaf’s Hillside Project capacity of about 85. 000 tpy.

Less than a one-fourth of Bayside’s production was exported. Ten old ages subsequently. the Bayside works was expanded through the resettlement to Richard’s Bay of a likewise sized works in Niigata. Japan. that had been shut down due to intensifying energy costs. Over three quarters of the new plant’s production was exported as metal bar. In 1989. South African excavation and metals elephantine Gencor acquired a commanding involvement in Alusaf. The other primary stockholders were Swiss aluminium manufacturer Alusuisse and South Africa’s quasigovernmental Industrial Development Corporation ( IDC ) .

Gencor was founded in 1980 by the amalgamation of two major mining companies. each founded in the late 19th century. Since that amalgamation. Gencor had been a diversified fiscal. excavation and industrial pudding stone. In May 1993. Gencor announced it was whirling off its fiscal and industrial involvements in order to refocus on its excavation. metals. and minerals concerns. In add-on to Alusaf. the companies retained in the “unbundled” Gencor included the world’s third-largest gold manufacturer. the world’s second-largest Pt manufacturer. the world’s largest manufacturer of ferroalloys. and the world’s largest provider of Ti dioxide feedstock.

Basic fiscal consequences for Gencor are given in Table A. Table Aduction of secondary aluminium had held comparatively steady at about 30. 000 tpy since 1980. Together with primary production. this brought entire domestic production to about 200. 000 tpy ( see Exhibit 1 ) . In 1994. semifabrication in South Africa remained chiefly focused on domestic demand. South African aluminium exports totaled about 100. 000 tpy. of which 20. 000 tpy were semifabricated merchandises and 80. 000 tpy were metal bars.

Domestic ingestion totaled approximately 130. 000 tpy. of which about 30. 000 was imported merchandises ( see Exhibit 2 ) . The Hillside Project Escom. South Africa’s electrical power public-service corporation. initiated treatment of the Hillside undertaking with Alusaf in mid-1991. With aluminium monetary values around $ 1. 300 per ton. Alusaf had suggested to Escom that the Bayside smelter was non economically feasible given market conditions and might be shut down. Escom responded with an offer to cut down power rates dramatically if Bayside were kept unfastened and an extra installation at Richard’s Bay constructed.

Escom offered to provide the smelter’s about 680 Mw electricity demands under an unusual long-run contract. About half the world’s smelters operated under contracts vouching discounted electricity for multiple old ages ; frequently these contracts tied the monetary value of electricity to the monetary value 2 This papers is authorized for usage merely in PGDM 1st Year – 1007 by Rakhi Singh at IILM Institute for Business and Management. Gurgaon ( IILM-IBM. Gurgaon ) from October 2013 to April 2014. Aluminum Smelting in South Africa: Alusaf’s Hillside Project 799-130

of aluminium and employed complicated expressions that imposed caps and floors on monetary values. The 25year Escom/Alusaf contract was alone in its simpleness: Alusaf would pay Escom 16 % of the per-ton monetary value of aluminium for every ton of aluminium produced. presuming the works produced at its designed efficiency. While the contract did contain commissariats protecting Escom from inefficient production. it did non protect Escom against fluctuations in the monetary value of aluminium. Escom and Alusaf were besides discoursing whether Escom might take an equity interest in the installation.

As a consequence of high growing projections in the seventiess. Escom had built tremendous bring forthing capacity of 38. 000 Mw. of which 8. 000 Mw now stood idle. Rob Barbour. pull offing manager of Alusaf. claimed that the high energy demands of aluminium production made aluminium basically “frozen energy” and that hence Alusaf “will go an exporter of South African energy with one high value-added. ” For proviso of all the basic technology and engineering for the works. Alusaf planned to contract with Pechiney. the Gallic house whose engineering had been used in over three quarters of all recent smelter undertakings.

Missing bauxite and alumina operations. Alusaf intended to import the full 900. 000 tpy alumina demand of the new smelter and had negotiated a probationary aluminum oxide supply understanding with Alcoa of Australia and Billiton ( a subordinate of Royal Dutch Shell ) . This contract tied the monetary value of aluminum oxide to the monetary value of aluminium. a common catching pattern employed by about half the world’s smelters. For the Hillside works. this contract ensured that per-ton aluminum oxide and power costs would ever amount to 41 % of the monetary value of aluminium.

Estimates for other operating costs at Hillside are given in Table B. Capital costs were estimated to entire $ 2 billion. Table B Hillside’s Projected Operating Costs ( $ per ton ) Other natural stuffs $ 143 Plant power and fuel 17 Consumables 32 Maintenance Labor Freight 38 68 40 General and administrative 32 Before the feasibleness survey was complete. Barbour announced that he believed there was a “high probability” the smelter would be approved. “In the interim we hope to discourage others from believing about aluminium smelter undertakings. ” he added.

“We want to scare them off by converting ii them that this one is unstoppable. ” The Decision In early 1994. probationary contracts for power. aluminum oxide. and the smelting engineering were all in topographic point. and willing investors had been lined up. The funding program called for $ 1. 9 billion of new capital to be raised. about $ 830 million of it in equity. Gencor was to lend $ 340 million in 3 This papers is authorized for usage merely in PGDM 1st Year – 1007 by Rakhi Singh at IILM Institute for Business and Management. Gurgaon ( IILM-IBM. Gurgaon ) from October 2013 to April 2014.

799-130 Aluminum Smelting in South Africa: Alusaf’s Hillside Project equity. the IDC $ 270 million in equity. other local establishments $ 140 million in equity. and Escom $ 80 million in exchangeable debt. Three new smelters utilizing the Pechiney engineering had been completed in recent months. Now. Hillside was the lone planned smelter undertaking. and a figure of other proposed undertakings had been cancelled. Equipment providers were citing Alusaf monetary values 20 % to 30 % below those supplied for the feasibleness survey. and the capital cost of the new works was now projected to number merely $ 1.

6 billion. At the beginning of 1994. aluminium monetary values stood at $ 1. 110. Aluminum-producing states had scheduled meetings in the approaching months to turn to the universe oversupply of aluminium. but it was ill-defined whether monetary values would retrieve anytime shortly. Barbour wondered whether he should perpetrate to this tremendous and ambitious undertaking in the face of these unsure industry conditions. 4 This papers is authorized for usage merely in PGDM 1st Year – 1007 by Rakhi Singh at IILM Institute for Business and Management. Gurgaon ( IILM-IBM. Gurgaon ) from October 2013 to April 2014.