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A in...“ . talk»... .... . :43}. €0.41...“ . as“ , . - . . . 1 . 2-..4 i . ...-ix - ....- --......-.43 .... .-.. . - .31....- ... - . .. - ...”..n f-.¢u...-.....c u;...§-9§.€-r¢vmv% a...wxrsh,iuw..vu..§ . . _ . . . . .. .. ......- V. .... I , é}, a Micl‘iigan cate ’ . . Univers. E I gyfi IIIIIIIIIIII I This is to certify that the I thesis entitled ALUMI NUM I NGOT MARKET I95’9- I968 presented by EMI L ALBERT has been accepted towards fulfillment of the requirements for D R A degree in PRODUCTION W Major mow Date April 30: I971 0.7 639 '1... ’ wt». r " '. v 200 A337 ABSTRACT ALUMINUM INGOT MARKET 1959 - 1968 BY Emil Albert The study examined fluctuations in the aluminum in— mfiznmrket in the United States during the period 1959—1968. Causes of the fluctuations were identified, and the extent to which they effected purchasing, inventories, and ship— nents were analyzed. The study also provided information relative to the physical and economic characteristics of the market. Direction for the study was provided by the follow- ing hypotheses. Hypothesis I: During the period 1959-1968, causes of fluctuations in aluminum ingot inventories and shipments were the result of other than changes in the level of demand for ingot. Hypothesis II: The aluminum ingot producers follow policies which lead to inverse stock— sale ratios of aluminum ingot at the producing firms. Empirical data and historical evidence. used in conjunction with an aluminum industry model, provided a basis for the study. deli aIum his mark met L Luat Ker Emil Albert The model developed the relations between total (kfliveries, shipments, production, and inventories in the ahmdnum ingot market. The empirical data provided infor— mation required to perform trend analyses of total deliveries, shipments, production, and inventories. Historical evidence mas used to identify causes for the fluctuations in the market. Results of the study indicated that the market seg— ments were subjected to extensive fluctuations. These fluc- tuations resulted from yearwend institutional factors, threats of interruptions in supply from labor contract terminations and wars, and price increases. Production exhibited a stable linear growth with only minor fluctu- ations. Inventories acted as a dependent variable link kmtween deliveries and shipments, and production. Two additional elements which were discovered to have effects (Mlthe aluminum ingot market were the government stockpile and net of imports and eXports. Based on the results of the study, the hypotheses “Ere accepted and the following conclusions were formulated. 1. Specific conditions in the aluminum ingot market cause extensive short range Emil Albert fluctuations in the levels of deliveries and shipments of aluminum ingot. These conditions are identified above as year end inventory taxes, increased December shipments, threats of strikes and wars, and price increases. The conditions causing short range fluc- tuations in the level of aluminum ingot deliveries and shipments are predictable, under various degrees of certainty. The lack of certainty results from the timing, magnitude and duration of the conditions identified above. Aluminum ingot purchasers react to the un- certainty of conditions by overbuying material to hedge against threatened supply interruptions. The most extensive fluctuations in the level of deliveries and shipments of aluminum ingot are those resulting from industry labor contract terminations. Aluminum ingot inventories tend to follow an inverse stock—sales ratio. The inverse ratio results from deliberate policies of producers and users of aluminum ingot. Emil Albert 6. A form of hedging used by aluminum ingot pur- chasers is to increase the level aluminum ingot during periods of supply interruptions. 7. Labor contract negotiations have economic effect on both domestic producers and the labor employed producers. of imports of threatened an adverse aluminum ingot by domestic ALUMINUM INGOT MARKET 1959-1968 BY Emil Albert A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF BUSINESS ADMINISTRATION Department of Management 1971 If __ '0 70 3.725” @JCOpyright by EMIL ALBERT 1971 W 0 r «W uhI III“ «I. D« a I It A i .I ACKNOWLEDGMENTS This study would not have been possible without the many individuals who were so considerate in assisting during the course of the research. The information and guidance cifered by the various members of the aluminum producing mmiusing industry is greatly appreciated. Professor John H. Hoagland, who served as Chairman ci'the dissertation committee and assisted in locating financial help, deserves a special thanks. His continued guidance provided the needed assistance to bring the study to a conclusion. Sincere appreciation is also extended to Professors John W. Bonge and Frank H. Mossman for their assistance and suggestions. Financial support offered as a doctoral grant by the National Association of Purchasing Management provided nmch needed assistance in carrying out the research. The Continued interest and assistance of this organization 18 also appreciated. ii TABLE OF CONTENTS Page IJST OF TABLES. . . . . . . . . . . . . . . . . . . . viii LIST OF FIGURES . . .. . . . . . . . . .. . . . . . . . x IJST OF APPENDICES. . . . . . . . . . . . . . . . . . xi Chapter I. INTRODUCTION AND HYPOTHESIS. . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . Need for the Study . . . . . . . . . . . . Review of Previous Literature. . . . . . . Inventories - General . . . . . . . . . Pre 1959 . . . . . . . . . . . . . . Post 1959. . . . . . . . . . . . . . Stock-Sales Ratios. . . . . . . Pre 1959 . . . . . . . . . . . . . . Post 1959. . . . . . . . . . . . . . Inventory — Price Speculation . . . . . Pre 1959 . . . . . . . . . . . . . . Post 1959. . . . . . . . . . . . . . o . o o l—' OkomflohmowaNl-‘H Expectations of Supply Interruptions. . 10 Pre 1959 . . . . . . . . . . . . . . 11 Post 1959. . . . . . . . . . . . . . 11 Unfilled Orders and Backlogs. . . . . . 13 Post 1959. . . . . . . . . . . . . . 13 Capacity. . . . . . . . . . . . . . . . 15 Summary . . . . . . . . . . . . . . . . l6 Hypotheses and Questions . . . . . . . . . 17 Limitations of the Study . . . . . . . . . 19 Organization of the Study. . . . . . . . . 21 II. RESEARCH METHODOLOGY AND COLLECTION 23 OF DATA . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . 3: Selection of Data Sources. . . . . . . - . 26 Monthly Aggregate Data. . ... . . . . . Chronology of Significant Historical 27 Events . . . . - ° ° ° iii Chapt Chapter page Interviews and Questionnaires . . . . . 28 Collection of Data . . . . . . . . . . . . 31 Monthly Production Capacity . . . . . . 31 Primary Production, Shipment, and Inventory Data. . . . . . . . . . 33 Secondary Production, Shipment, and Inventory Data. . . . . . . . . . 33 Import and Export Data. . . . . . . . . 35 Stockpile Data. . . . . . . . . . . . . 35 Use of Data. . . . . . . . . . . . . . . . 36 III. THE HISTORY OF THE ALUMINUM INDUSTRY . . . . 38 Significant Historical Developments. . . . 38 The Experimental and Discovery Stage. . 39 The Process Development Stage . . . . . 40 The Monopoly Stage. . . . . . . . . . . 43 The War Expansion Stage . . . . . . . . 46 The Expansion and Diversification Stage . . . . . . . . . . . . . . . . The Current Structure of the Aluminum Ingot Producing Industry . . . . . . . . 52 Aluminum Company of America . . . . . . 52 Anaconda Aluminum Compan . . . . . . . 52 The Consolidated Aluminum Corporation . 53 51 Harvey Aluminum, Incorporated . . . . . 53 Intalco Aluminum Corporation. . . . . . 53 Kaiser Aluminum and Chemical Corporation . . . . . . . . . . . . . 53 Ormet Corporation . . . . . . . . . . . 54 Reynolds Metals Company . . . . . . . . 54 Secondary Producers. . . . . . . . . . . . 55 Foreign Sources. . . . . . . . . . . . . . 56 IV. STRUCTURE OF THE PRODUCTION AND CONSUMPTION SEGMENTS OF THE ALUMINUM INDUSTRY . . . . . . . . . . . . . 58 Introduction . . . . . . . . . . . . . . . 58 The Production Segment . . . . . . . . . . :3 Production Stages . . . . . . . . . . . 60 Mining . . . . . . . . . . . . . : I 61 Alumina Refining . . . . iv Chapter Page Reduction. . . . . . . . . . . ... . 62 Mill Products. . . . . . . . . . . . 63 Parts Fabrication and End Product Manufacture. . . . . . . . 63 Secondary Processing . . . . . . . . 65 Industry Cost Structure . . . . . . . . 67 Locational Factors and Transportation Considerations. . . . . . . . . . . . 71 .Determination of the Controlling Production Operation. . . . . . . . . 73 Structure of the Consumption Segment. . 74 The Major Markets. . . . . . . . . . 74 Current and Projected Market Shares. 78 v. ' CURRENT ALUMINUM INGOT MARKET CHARACTERISTICS . . . . . . . . . . . . . . 80 Introduction . . . . . . . . . . . . . . . 80 Market Characteristics . . . . . . . . . . 80 Price Characteristics . . . . . . . . . 81 Physical.Characteristics. . . . . . . . 82 Inventory Characteristics . . . . . . . 87 World Production Characteristics. . . . 89 Study Assumptions. . . . . . . . . . . . . 90 VI. ALUMINUM INGOTVDELI‘VERIES AND SHIPMENTS: 1959~1968 . . . . . . . . . . . 91 .Definition of Deliveries and Shipments . . 91 Total Deliveries. . . . . . . . . . . . 92 Shipments . . . . . . . . . . . . . . . 92 Comparison of Shipments and Total Deliveries. . . . . . . . . . . 92 Variations of Monthly Patterns . . . . . . 93 Analysis of Delivery and Shipment Patterns . . . . . . . . . ... . . . . . 94 .Analysis of Long Range Trends . . . . . :2 Quarterly Fluctuations. . . . . . . . . Year End Fluctuations. . . . . . . . 102 Contract Termination Effects . . . . . . . 104 Fluctuations caused by Labor Con- 104 tract Negotiations. . . . - . . . - o 109 Price Change Fluctuations . . . . Cha1 III I I I II Chapter Page The Effect of Price Change POlicy' O O O O O O O O O O C O O O 120 War Threat Inventory Fluctuations. . 121 VII. .ALUMINUM INGOT PRODUCTION, INVENTORY AND IMPORT-EXPORT VARIABLES . . . . . . . . 122 Introduction . . . . . . . . . . . . . . . 122 The Aluminum Ingot Market Model. . . . . . 123 Production . . . . . . . . . . . . . . . . 125 125 Ingot Production Capacity . . . . . . . Utilizations of Aluminum Ingot Capacity. . . . . . . . . . . . 126 Change in Capacity Utilization . . . 128 Fluctuations in Production. . . . . . . 130 Production Activity During Business Declines . . . . . . . . . . 131 1960-1961 Business Decline . . . . . 133 1967 Business Decline. . . . . . . . 134 Summary of Business Declines . . . . 135 Inventories. . . . . . . . . . . . . . . . 135 Apparent Accuracy of Inventory Data . . 136 Inventories as a Dependent Variable . . 137 Year End Institutional Fluc— tuations . . . . . . . . . . . . . 139 Aluminum Industry Strike Hedge Fluctuations . . . . . . . . . . . 139 Imports and Exports. . . . . . . . . . . . 140 War Threat InVentory Hedge. . . . . . , 143 Summary. . . . . . . . . . . . . . . . . . 144 VIII. SUMMARY AND CONCLUSI-f)..\7!3. . . . . . . . . . . 146 146 o o o o o o o . 146 O O O O O O O O O O 0 O 0 Conclusions. . . Hypothesis I Conclusion I . . . . . . . . . . . . 147 Conclusion Ii . . . . . . . . . . . 148 Conclusion III . . . . . . . . . . . 149 Conclusion IV . . . . . . . . . . . 151 Hypothesis II . . . . . . . . . . . . . 151 Conclusion V . . . . . . . . . . . . 152 Analysis of Questions . . . . . . . . . 152 Conclusion VI. . . . . . . . . . . . 153 Conclusion VII . . . . . . . . . . . 154 Vi Chap IIIPI Chapter BIBLIOGRAPHY} APPENDICES . vii Table 10 ll 12 LIST OF TABLES Comparison of Ingot Shipments to Total Industry Shipments, 1959-l968-- Millions of Pounds. . . . . . . . . . Aluminum Mill Products Producers, 1968. Actual and Projected Supply of Scrap Aluminum Available for Processing by the Secondary Industry . . . . . . Estimated Average Cost and Price of Aluminum Products on a Per Ton Basis. Estimated Volume of Basic Materials Transported for the Aluminum Industry - 1967 . . . . . . . . . . . Current and Projected Aluminum Market Share by Category . . . . . . . . . . Average Daily Total Deliveries of Aluminum From the Ingot Stage Ranked by Quarters, 1959-1968. . . . . . . . Average Daily Shipments of Aluminum Ingot From Primary Domestic Producers Ranked by Quarters, 1959-1968 . . . . Tabulation of High and Low Months of Average Daily Deliveries and Shipments, 1959-1968. a o o o e o o o A Comparison of Per Cent Change in Average Daily Deliveries and Shipment Activity in December and January, 1959-1968 0 o o o o o o o o o o o I o o Fluctuations in Average Daily Deliveries Caused by Labor Contract Negotiations in the Domestic Aluminum Industry for Selected Years, 1959-1968 . . . . . . A Summary of Attempted Aluminum Ingot Price Changes, 1959—1968. . . viii Page 20 64 66 68 72 78 99 100 101 103 109 111 Table Page 13 Gross Deliveries and Shipments of Aluminum Ingot for Selected Months Affected by Price Changes, l959e1968. . . 116 14 Correlation of Expected and Actual Changes in Deliveries and Shipments of Aluminum Ingot for Selected Months Affected by Price Changes, 1959—1968. . . . 119 15 Summary of Absolute and Incremental Aluminum Ingot Capacity Changes, 1959-1968 . . . . . . . . . . . . . . 127 16 Fluctuations in the Level of Average Daily Aluminum Ingot Production Occurring in the Period 1959-1968 . . . . . 131 17 Comparison of Average Daily Shipment Fluctuations and Inventory Changes Resulting From Aluminum Industry Labor Contract Negotiations . . . . . . . . 140 18 Estimated Additional Primary Aluminum Imports Occurring During Labor Contract Negotiations . . . . . . . . . . . 144 ix LIST OF FIGURES Figure 1 History of the Development of Theories of Previous Authors Relative to the Effect of Inventories on Business conditions 0 O 0 O O O O 0 O O O O O 2 A Physical Flow Model of the Aluminum Production, Procurement, Inventory, consumptiC‘n CYCle o o o c o o o o o a , 3 Comparison of Reduction Capacity and Demand Changes Over Time. . . . . . 4 Average Daily Deliveries and Shipments of Aluminum Ingot Per Trading Day Compared to a Linear Trend, 1959-1968 5 A Model of the ProductioneInventories- Shipment Relationship . ... . ... . . 6 Domestic Aluminum Ingot Production and Capacity Utilization, 1959-1968 . . . 7 Domestic Aluminum Ingot Production, Inventories, and FRB Index of Industrial Production, 1959-1968. . . fis+ 8 An Illustration of the Effect or Production and Shipment Levels Inventories in the Aluminum Ingot Model . . . . . . . . . . . . . C" n 9 Imports and Exports of Primary Aluminum Ingot, 1959-1968 . . . Page 16 24 83 97 123 129 132 141 IPP‘ LIST OF APPENDICES Appendix Page A Chronology of Significant Historical Events 1959—1968 . . . . . . . . . . . . 160 B Exhibit 1 -- Guide for use in Direct Industry InterViews, Questionnaires, and Telephone Follow-ups of Interviewees . . . . . . . . . . . . . . 173 Exhibit 2 -— Aggregate Responses to Direct Industry Interviews, Questionnaires and Telephone Follow—ups of Interviewers 175 C Domestic Primary Aluminum Reduction Capacity, 1959-1968. . . . . . . . . . . 178 D Primary and Secondary Aluminum Ingot Production, Shipment and Inventory Data 0 O 3 O a D O O C! O O O 8 J 0 C O O 188 E Primary and Scrap Aluminum Ingot Imports and Exports and Stockpile Data . . . . . 193 F Aluminum Ingot Average Daily Activity in Production, Deliveries, Shipments, Capacity Utilization . . . . . . . . . . 201 G Calculation of Linear Trend Lines. . . . . 209 H Examples of Discrepancies in Reported Aluminum Ingot Capacity, 1959—1968 . . . 213 xi CHAPTER I INTRODUCTION AND HYPOTHESES Introduction This study is undertaken to examine fluctuations in the aluminum ingot market inrthe United States during the period 1959-1968. Causes of the fluctuations will be identi: fied and the extent to which they effect purchasing, inven- 1xuies,and shipments will be analyzed. Need for the Study One justification for this study rests with the Icontributions it can make toward confirmation or refutation of current business and economic theories, as revieWed inxfi the following section. This contribution will be approached by developing the Operating characteristics of the aluminum ingot market during the period 1959—1968 and then comparing these characteristics with existing theories. In this em— Efirical approach, differences, if any, between actual 53d theoretical conditions, should provide insights into the Validity of applying the theories to a specific market. a b( buy: stu stu ur 111 f1 rel st ta Dr C: 5‘ l S I k 2 A further justification for the study is to provide a.better understanding of the aluminum ingot market for the tmyers and sellers who participate in the market. Currently, there is only a limited number of similar studies. One is the work of Rodney L. Boyes, who made a study of the timing and magnitude of fluctuations of steel purdhases and inventories.1 Another study of a somewhat similar nature was the work of Ruth Mack, who directed her efforts more toward consumer commodities.2 Additional references are discussed in the following section. Review of Previous Literature In order to provide background material for the study, an investigation of previous literature was under~ taken. This investigation, while not exhaustive, does provide a background of previous major writings and indi- cates the change in emphasis through the years. The findings varied from both an historical and subjective standpoint. Early studies were generally k 1Rodney L. Boyes, "Fluctuations in Steel Purchases and Inventories 1953—1963", Unpublished DBA Thesis (Michigan State University, East Lansing, 1964)- 2Ruth (Prince) Mack, Information, Expectations, and lflléfitory Fluctuations (New York: National Bureau of Economic Research; distributed by Columbia University Press, ‘967). 3 directed toward consideration of inventories, in total, as a factor in business conditions. These general inventory theories Were later modified to consider stock~sales ratios. Mbre recent theories consider further aspects of the gen” eral area of inventories. This includes the elements of fluctuations, expectations, unfilled orders, backlogs, and capacity. The results of the review of previous literature are summarized below. In this, the material is divided by subject matter. Within the subject matter it is reviewed chronologically. Inventories — General rThe consensus of writers seems to be that invenu tories have an important and aggravating effect on short cycle fluctuations in business activity, although there is no complete agreement as to the precise role. Pre 1959 - In his early work John Maynard Keynes attributed fluctuations in inventories to miscalculations on the part Of manufacturers.3 'Ehe theories eXpressed in this classic —; 3John Maynard Keynes, The General Theory of Employ: fléflt. Interest and Money (New York: Harcourt, Brace and Company) . « 1936, p. 332. . AVV~ e Jrlm U n v.1 . \ n» \ “k .|.« fix~ «\u 1“ 4 economic writing were the basis of many business decisions chuing the recession, war, and recovery years. One conflict of ideas that developed was in rela— tion to the timing of the inventory changes. Moses Zflmamovitz concluded that, with reapect to timing, inventory changes would lag changes in output.4 Post 1959 — Revised theories were also deveIOped with regard to the effect of inventories and inventory changes. This aggravating effect of inventory changes has been the subject of extensive research by Professor John H. Hoagland. In 1960, he stated the following: Large, violent fluctuations in inventories continue to occur. During the past twelve years the annual variations were greater in magnitude and volatility for the GNP category "changes in non-farm business inventories" than any other category, with the exception of federal expendi— tures.5 Fbllowing this, Thomas M. Stanback, Jr., developed the idea that inventory fluctuations were a leading indicator when considering elements of unfilled orders, availability of E 4Moses Abramovitz, Inventories and Business Cycles (New York: National Bureau of Economic Research, Inc., 1950). p. 317. 5John H. Hoagland, Purchasing and Inventory Fore— casting (A paper read before the Business and EcOnomic Section-of the American Statistical Association, Stanford University, August, 1960). max .fi. 9 Wu» 8 ...lu «v \ “\k h” At r\ . . 6 materials, and prices. Businessmen similarly realized that inventories have an aggravating effect on the level of business ‘activity. Typical comments appeared in the Kaiser annual reports where the following comments were made: . . . customers' inventories were at reduced levels at year end; there is therefore reason to believe that even a modest improvement in the nation's metal-working industries during 1961 will result in increased aluminum shipments.7 And further, when commenting on lower prices and shipments in 1967: ". . . included a decline in aluminum shipments reflecting reduced demand . . . and inventory reduction by ' “'8 users of aluminum. This brief summary of theories, relating to the general aspect of inventories, serves to illustrate that inventories exist to provide insurance against interrupted Operations and to protect against possible shortages of 6Thomas M. Stanback Jr., Inventory Fluctuations 2&6 Economic Stabilization. Annual Report Prepared for the Joint Economic Committee (Washington: U. S. Government Printing Office, 1961), p. 3. 7"Annual Report,” Kaiser Aluminum and Chemical Corp. (Oakland: 1960). 8”Annual Report,” Kaiser Industries Corp. (Oakland: 1967) . 1H4 \H\ \P« materials. Stock—Sales Ratio In addition to serving as protection against inter- ruptions of supply, inventories also exist to meet antici~ pated future market demands. The amount of inventory carried to meet future market demand is reflected, at least in part, by a comparison of the amount of inventory on hand and the level of current sales. This comparison is widely known as a stockmsales ratio. The theory, in effect, says that if a businessman found a change in the level of sales, he would react by changing the level of inventories in the same direction. A controversy, as illustrated below, has developed reGarding the validity of this stock-sales ratio theory. Unfortunately, empirical data have failed to substantiate theories relating to the stockwsales ratio, rather they have served to point out discrepancies in the theorY~ ' ' " i- 'as existed for a B£2_£2§2- Recognition of discrepanc es h number of years, and attempts were made to explain them, ln part, by reasoning such as that voiced by Abramovitz when ¥ 9J. H. Westing and I. V. Fine, Industrial EEEEEEEEEE. 3rd edi. (New York: John Wiley & Sons, Inc., 1961). p. 263. he wrote: It is also true that because inventories typi- cally lag behind production and sales at cyclical turning points, an inverse movement in the stock— sales ratio is bound to occur over at least part of the cycle.1 Abramovitz in his studies, postulated that typi- cally stock—sales ratios decline when production is ex- panding and vice versa. Just prior to the time period of this study, Clarence L. Barber, in his study of inventories and busi- ness cycles, arrived at a different conclusion as to the cause of fluctuations in the stock-sales ratio. He stated: . . . Since major firms have adapted better methods of controlling inventories during recent decades, it seems likely that the inverse move- ment of the stock—sales ratio may be the result, in part at least, of deliberate policy. fpst 1959. Dr. John H. Hoagland recognized for some time that businessmen do not attempt to maintain a constant stock-sales ratio. In 1960, he stated . . . "Moreover, it has been assumed frequently that a constant inventory to sales ratio is the target. This is not true in many times -___ loAbramovitz, Op. citoc pp. 144-45. _ llclarence L. Barber, Inventories and the Business chle*with Special Reference to Canada (Toronto: The 'fi_ University of Toronto Press, 1958), p. 4. 8 of threatened shortages or excesses." Finally, ‘ in her recent bodk, Ruth Mack concludedrthat statistical studies failed to show a stock-sales relation which indicated that tmsinessmen were concerned with holding a constant stock— sales ratio. Rather, she reasoned that other factors were more significant in determining levels of stocks than the expected volume of sales.13 Her conclusion was: . . . that a very substantial amount of the fluc- tuation in material stocks on hand and on order . . . appears to-be influenced by variables other than changes in sales. The maintenance ofra constant stock-sales ratio I I. ’ ' ‘ O continueS'to be a controversial area. InventoryePrice'Speculation The controversy regarding stock-sales ratios raises the question: given that fluctuations do occur in the stock— sales ratio and that businessmen may cause the fluctuations by deliberate policy; what would cause businessmen to change their inventory policy? A possible reason why businessmen may take deliber- ate action to change inventory levels and hence, change the leoagland, Op. cit. l3Mack, op. cit., p. 3. 14Ibid.. p. 9. .. a /,_r L; 5‘“ a a. 9 stoCk-sales ratio, is to speculate on the price changes of a commodity. Pre 1959. As far back as the 1940's, Albert Hart considered inventory speculation. He observed that the level of inven— tory speculation becomes a function of the extent to which tie increased cost of carrying the inventory can be offset tw'profits earned on the inventory during inflation.15 An important consideration was also pointed out by Nathaniel Emgle et. a1. They brought out the use of internally gen- erated funds to finance inventories in the short run.16 Barber also recognized the existence and possible effect of speculation. Barber states that, "Numerous “miters have argued that, in periods of rising prices, Speculative accumulations of stocks are likely to occur xflflch will temporarily reinforce the price rise and may Hake a subsequent recession inevitable."17 and, Finally, business firms may use their inven— tories as a method of earning speculative profits. 15A1bert Gailord Hart. Money. Debt: and Economic Activity (New York: Prentice—Hall, 1948), p. 244. l6Nathaniel Howard Engle, et. al., Aluminum, An Industrial Marketing Appraisal (Chicago: Richard D. Irwin, Inc.. 1945), p. 125. 17Barber, pp. cit., p. 7. 10 When prices are expected to rise, business firms will have an incentive to build up their inven- tories in order to liquidate them at a profit .... How important this policy may be in causing an accumulation or liquidation of inventories cannot easily be determined. Post_l959. That inventory-price speculation exists appears to be acknowledged, although not always recommended,asgindir cated by‘Westing and Fine.19 Of a mere recent nature is the study of—Mack. In this study she reiterates that, "Expectations that materials prices will rise could be another reason for extending Haterial ownership," 0 but at the same time she cautioned that: Extension of stock on hand and on order predi— cated on an expected rise in prices occurs at increasing costs and this causes priced-timed ownership in any form to have ceiling levels.21 Expectations of Supply Interruptions Just as inventory-price speculation has become recognized as a reason why businessmen may make adjustments to stock-sales ratios, the area of eXpectations of supply 18Ibid., p. 5. 19Westing and Fine, 02. cit., p. 265. 20Mack, Op. cit., p. 10. 21Ibid., p. 14. pro H1 Eti 31. v1 ll interruptions also has been recognized as a possible cause. Pre 1959. One of the earlier authors who recognized the pmoblem concerning short range eXpectations was Hart: vmiting in 1948 about union organizing in the 1930's, he stated: "Threatening users of commodities both with inter— ruptions of supply through strikes and with higher labor costs, this organizing drive helped to motivate a very . . . . . . 22 rapid increase of buSiness inventories in 1936—1937.“ Post 1959. Hoagland, in 1960, also recognized that changes in expectations were a prime factor in causing changes in inventory levels. He wrote: . . Vendor performance (a measure of lead- time) . . . influences inventory accumulations and liquidations. If slower vendor performance is expected or experienced, inventory safety targets are raised and purchase inventories are increased. . . . If vendor performance is faster, or is expected to be faster, the resulting tend— ency is to cause liquidation. . . . If sources of supply are to be shut off, purchasers, to keep production from being shut down, must either accumulate purchase inventories ahead of time, seek alternate sources of supply, or both. Patrick J. Robinson and Charles W. Faris indicated a recognition of the effect of expectations when they wrote, M 22Hart, 02. cit., p. 323. 23Hoagland, Op. cit. n T} im 12 ”The threat of material or parts shortages, whether real or imagined, will have an impact on purchasing. Fears of shortages typically lead to forward buying and stock- piling."24 George W. Aljian reinforced these conclusions. Eb wrote: ”If the commodity under consideration is being produced by an industry fraught with frequent labor insta- bility, then close attention to labor contracts and aware— ness of the possibility of interrupted work schedules are necessary in order to make sound forward buying decisions." Lastly, Howard L. Timms expressed a similar conclusion relative to raw materials purchases. He stated: Work in process and raw material . . . normally are a function of end item production and bear a rather constant relationship to end item in- ventories expressed as a ratio. With this ratio applied to end item inventory level, the level of total inventory may be aggregated in dollars for the beginning and end of the coming fiscal year. An exception to this process would be raw material inventories. These are subject to shifts reflecting top management policy on price hedging or hedging against supply break- downs. For instance, expectations of a strike next year at a supplier's plant would be hedged by shifting upward the ratio of the affected raw material to total needs as "exploded" from 4 . . Patrick J. Robinson and Charles W. Faris, lfldustrial Buying and Creative Marketing (Boston: Allyn and Bacon, Inc., 1967), p. 120. 25George W. Aljian, ed., Purchasing Handbook (New York: McGraw-Hill Book Company, Inc., 1966), pp. 12— 8L whi 13 the sales forecast.26 These writings indicate that there is an awareness to possible interruptions of the supply of a raw material which necessitate action, on the part of purchasers, to protect their Operations from being shutdown. These expec~ tations of problems led the writer to anticipate that over— buys and underbuys of material might occur. The possible increased purchasing activity leads to a need to consider further factors in procurement which are unfilled orders and backlogs at supplier plants. Unfilled Orders and Backlogs This review of previous literature only uncovered one early reference to the subject of unfilled orders and backlogs. This was made by Barber when he commented on the fact that the ease with which a firm can change inventories will depend on the time between orders and deliveries.27 Ppst 1959. Through the technique of "Monthly Change Indices” which were reported on by Hoagland in 1959,28 the 26Howard L. Timms, The Production Function in Busi- EfiflfiofiHomewood: Richard D. Irwin, Inc., 1966L p. 475 27Barber,o op. cit. , p. 6. 28John H. Hoagland, Monthly Change Indices and other New Measures of Business Fluctuations (Paper presented at the Business and EconomICaI Statistical Section of the Sgerican Statistical Association: Washington D. C.. December I 1959) t: mind I order: gener‘ Conve effec matic ordel race! stat: inVe 14 existence of wide fluctuations in levels of unfilled orders and the resulting effect on leadtime was illustrated. These relationships led Hoagland to conclude that increased de— mand led to increases in orders and backlogs (unfilled orders) which in turn led to increased leadtimes which generate increased orders and a continuation of the cycle. Conversely, decreases in demand would have the Opposite effect. Moreover, business suffers from a lack of infor- mation relative to levels and rates of change of unfilled 29 orders Which further complicates the situation. More recently, Mack also reached a similar conclusion when she stated, ". . . unfilled orders help to explain inventory . 30 F . . . investment." ”Ir delivery terms change, so Will the . . ”31 average periods that orders are outstanding. She con- cluded from specific studies ”. . . that inventory invest— ment is, roughly, equally influenced by unfilled orders and sales.”32 It can be presumed that purchasing overbuys and underbuys act as a source Of-information by which a \ k 29Hoagland: Purchasing and Inventorprorecasting° 30Mack, op. cit., p. 21. 31Ibid., p. 154. 32Ibid., p. 22. manufa busine to est levels busine 15 manufacturer may establish inventory levels and rates of tmsiness activity. At this point it does not appear possible to establish a specific degree to which varying purchasing levels, along with unfilled orders, affect inventories and business activity. Capacity The effect of the limitation of capacity has been the subject of numerous theoretical studies. One type of study that this has included is the quantitative approach of queuing theory. Another type of study has been through the use of models such as the work of Jay W. Forrester. In these cases the studies have been of a theoretical nature and not of an empirical nature. There appears to be a lack of empirical studies relative to the effect of capacity on production levels and inventories. In her work, Mack was unable to locate any general relationship of the effect of capacity limitations. She .stated “. . . the examination of the data available on plant capacity and its utilization fails to provide the basis for attributing the buildrup of buying waves to physical capacity limitations.”33 qu0 nglelcally directed to the aluminum industry, “..., —... --... ..- ... ,‘_._.__.....—- 33Ibid., p. 11. effe ini gene stoc l6 Engle suggests that there is the possibility that producers vmuld produce for inventory during particular times of the year if power were unavailable at other particular times during the year.34 Summary The development of ideas and theories regarding the effect of inventories on business conditions is summarized in Figure 1. This illustrates how early ideas regarding the general effect of inventories lead to consideration of the stock-sales ratio. FIGURE 1 HISTORY OF THE DEVELOPMENT OF THEORIES OF PREVIOUS AUTHORS RELATIVE TO THE EFFECT OF INVENTORIES ON BUSINESS CONDITIONS fi‘ _......._._ a—au—n‘ Inventories General {—Stock—Sales Ratipzj Inventory Fluctuations __ w p__ . L___a>{*Unfilled Orders and Backlgg_}‘—‘——“ [Capacity_Limitations—l 34Engle, Op. cit., p. 95. sales freqt tion: las rat 17 In attempting to apply the idea of a constant stock- sales ratio, a number of writers discovered that fluctuations frequently occurred. At least two causes of these fluctuau tions were identified as price speculation and speculation to cover threatened supply interruptions. Discovery of the area of speculation, which is re» flected by purchasers in overbuys and underbuys, lead to an investigation of how unfilled orders and backlogs effect business conditions. Lastly, consideration of how capacity limitations might effect business conditions has been studied. This last area has been approached mainly from a theoretical rather than an empirical nature. 5x221; lies-cs-ess-__.Qns—3e;tiess The preceding review of previous literature indie cates that there are variations in theories that have been developed to eXplain the causes Of fluctuations in pur— Chasing. inventories and shipments. This review also shows that in the last decade a substantial increase has occurred in the awareness Of this area. Along with this increase in awareness has come a corresponding increase in the attempts to provide explanations for these fluctuations. This study, with its objective to analyze the purch ingot ident this sea AH idel 18 Inuehasing, inventory,and shipment segments of the aluminum ingot market, will attempt to add to existing knowledge by identifying causes Of fluctuations in this same market. To this end, the following hypothesis is established. HYPOTHESIS 1: During the period 1959—1968, causes of fluctuations in aluminum ingot in~ ventories and shipments were the result of other than changes in the level Of demand for ingot. This hypothesis does not negate the importance of secular, seasonal and cyclical conditions which may exist in the aluminum ingot market. Rather, the objective is to identify conditions which occur in the market and to estab- lish the significance of these conditions on the aluminum ingot market. Implied in the above hypothesis is the condi- tion pointed out in the previous review of literature that a change in expectations of future availability of material Will be reflected in purchasing activity which in turn will result in changes in order backlogs, shipments, and invenn tory levels. A second area which also has been subjected to numerous studies and expansion of theories in the last decade is the question of stockwsales ratios. This study will also investigate this area in relation to the aluminum ingot market. To this end, the following hypothesis is estal tion mark ing COM QUE 8X3 l9 established. HYPOTHESIS II: The aluminum ingot producers follow policies which lead to inverse stock- sales ratios of aluminum ingot at the pro- ducing firms. The first hypothesis is concerned with identifica- tion and measurement of conditions in the aluminum ingot nmrket. The second hypothesis is concerned with identify- ing specific actions of aluminum producers relative to the controversial area of stock-sales ratios. In addition to evaluating these hypotheses, specific questions relative to the aluminum ingot market will be examined. 1. Do significant levels of correlation exist between the rate of supply of aluminum and the rate of consumption in automobile pro— duction? 2. Are imports or exports major factors in the domestic aluminum market? 3. What information is available concerning lead— times and backlogs in the aluminum market? Limitations of the Study A series of restrictions were imposed in order to keep the study within manageable limits. The first limitation involved the selection of 1959-1968.as the time period for the study. The reason that the study was not carried back to an earlier time per: the COB —————— 20 period was because of the basic changes that occurred in the market prior to 1959. ‘ The second limitation involved the selection of the aluminum ingot market portion of the overall aluminum mar- ket. From the standpoint of volume, as indicated in Table > 1, this limitation restricts the study to the extent that approximately 70% of the ingot shipped during the period of , TABLE 1 COMPARISON OF INGOT SHIPMENTS TO TOTAL INDUSTRY SHIPMENTS, 1959—1968—-Mi11ions of pounds Ingot Percent Ingot Total Shipped to Shipped to Industry Independent Independent Year Shipments Producers Producers 1959 5,061.0 1,575.0 31.1 1960 4,732.5 1,608.6 34.0 1961 4,970.1 1,536.6 30.9 1962 5,772.5 1,858.6 32.2 1963 6,377.0 2,032.6 31.9 1964 7,171.3 2,228.6 31.1 1965 8,150.2 2,337.3 28.7 1966 9,031.6 2,340.1 25.9 1967 8,946.4 2,486.4 27.8 1968 10,087.l 2,784.8 27.6 Source: 1968 Aluminum Statistical Review, New York: The Aluminum Association, 1969, p. prod pail pem 21 the study was shipped to captive Operations of the ingot producers. However this limitation does not appear to im- pair the study because of the substantial number of inde- pendent producers in the market at this level. The third limitation involved the restriction of the study to the domestic aluminum ingot market and conSid— eration of imports and eXports as modifications which occur to the domestic market. Organization of the Study Chapter II entitled "Research Methodology and Collection of Data" reviews the sources of the data used in this study. In addition, estimates are included relative to the accuracy and credibility of the data. Chapter III entitled "The History of the Aluminum Industry" summarises the salient points in the deve10pment of the aluminum industry from its beginning in the early- 1800's to the termination of the study (1968). Chapter IV entitled "Structure of the Production and Consumption Segments of the Aluminum Industry"j reviews the supply and demand elements of the industry from mining to final consumption. Chapter V entitled "Current Aluminum Ingot Market Characteristics” combines the material of Chapters III and Ship mark 1m 5101 22 Dfinto specific assumptions for this study. Chapter VI entitled "Aluminum Ingot Deliveries and Shipments: 1959—1968,” is a trend analysis of the subject market. Chapter VII entitled "Aluminum Ingot Production, Inventory and Import-Export Variables" sets out specific stock—sales ratio conditions and import-export effects. Chapter VIII, the final chapter, is entitled "Summary and Conclusions.” CHAPTER II RESEARCH METHODOLOGY AND COLLECTION OF DATA Introduction The flow of material in the over—all aluminum in— dustry is depicted in the model in Figure 2. This model illustrates the various flows and stocks as the material nwves from the mining Operation, through the stages of the gmoduction segment, into the consumption segment. Also indicated in the model is the counter flow of material back through the salvage recovery stage. A history of how the aluminum industry developed into the physical flow model in Figure 2 is the subject of Chapter III. The current struc- ture of the over—all model is described in Chapter IV. A portion of the over-all model in Figure 2 has been extracted to form the area which will receive primary attention in this study. This portion, outlined in the central portion of Figure 2, is identified as the ingot market. The research methodology of the study was selected 23 24 FIGHHUB 2 i i A PHYSICAL FLOW MODEL OF THE ALUMINUM PRODUCTION ‘ PROCUREMENT, INVENTORY. CONSUMPTION CYCLE Bauxite 1 Mining Alumina Production Other Alumina Uses Ingot ExPort Independent Mill Products Production \ 4 Primary Ingot Production Gov't Stock Destructive Aluminum Uses ingot {Imports} r.—s_u— Oj THE SECONDARY MARKET Secondary Ingot Production .11 I a l O l o l O l ing7\4. I] ’ Independent Parts Fabrication LL Secondary Reclaimation Captive Mill Product Product Imports \4 Captive Parts Fabrication i End Products Production [fix Inventory points J6 Consumer I Eventual Salvage to {10' m m 25 to provide an'information/flow coincident with the physical flow in the model. To meet this objective, specific infor- mation, as discussed below, was selected. Selection of Data Sources With the establishment of historical information relative to the aluminum industry and the formulation of hypotheses and questions, the research consisted of the selection of Specific information sources to meet one or more of the following goals: 1. To establish the basic operating character- istics of the aluminum ingot producing industry. 2. To provide accurate and timely data to per- form a time series analysis of aluminum ingot shipments. 3. To measure irregular conditions of a procure- ment, production, inventory, and shipment nature. 4. To provide a summary of possible historical causes of irregular conditions. 5. To provide a basis for establishing associa— tions between the historical causes and the indicated conditions. In addition to meeting one or more of the above Criteria, it was necessary that the data also be available on a short time period basis so that long range data would not camouflage short range conditions. These guidelines led to the selection of sources to include: (1) monthly p pr ant ab< 26 aggregate data, (2) a chronology of historical events, and (3) interviews and questionnaires. Each of these areas is discussed below. Monthly Aggregate Data The purpose of aggregate data in this study is to provide information relative to the magnitude of Operations and fluctuations in the ingot producing segment of the aluminum industry as enumerated in goals 1, 2, and 3, cited above. A majority of the aggregate data required for this study was taken from a single source. This source is a monthly publication of the U; S. Department of the Interior, Bureau of Mines, and is based on information submitted directly to the Bureau of Mines by the aluminum producers and others.1 Data pertaining to stockpile deliveries and Withdrawals are scanty, but those that were available were obtained from the Department of Commerce.2 Lastly, as will be noted later and where required, additional data were ‘_i LMetals Industry Survey Aluminum Monthly,CU. S. Dept, of Interior, Bureau of Mines, Washington, D. C.) Issued Monthly. 2U. S. Dept. of Commerce, Business and Defense Services Administration, Aluminum and MagneSium DlVlSlon: WaShingtona D o C o 27 'c01lected directly from industry sources. Certain computational steps were necessary to con- vert the data into the prOper units of measurement for analysis. The basic Objectives of the computations were to gquerly reflect production and trading day factors. These calculations consisted of dividing monthly data by the appropriate number of days to convert data into tons per trading day or calendar day basis. (fluonology of Significant Historical Events The objective in collecting a record of historical events was to provide a source of information with which to compare fluctuations and conditions, which occurred in aluminum ingot production, inventories, and shipments. In collecting an historical record, the possibility existed that events would be prejudged, thereby creating a bias in the study results. In an attempt to prevent this from happening, data collection was sequenced so that first the events were recorded; second, the research was performed; and then the historical record was searched. In searching published records, any event which appeared to have a direct or indirect relation to the aluminum industry was selected forinclusion. This resulted in an extensive chronological record based on information 28 publiShed in Encyclopedia Britannica Yearbook, The wall Street Journal, The American Metal Market, and other selected periodicals. Included in the chronology were domestic and international events of a political, business, and economical nature, along with technical events directly ’ related to aluminum. The complete chronological recOrd became too volu— nunous to be made a part of the final research report. Con- sequently, only those events which ultimately proved to be of greatest significance are included in Appendix A, A Sum- mary of Significant Historical Events, 1959-1968. Interviews and Questionnaires Initial interviews were conducted to establish the feasibility of the study. These interviews with representa— tives of primary aluminum producers and trade associations representing various aspects of the aluminum industry con— sisted of preliminary evaluations of the subject matter of , 3 the study. Having established that the proposed study was in 3The aluminum ingot producing firms, who were con— tacted to participate in this study, are listed in Chapter III, Section, ”The Current Structure of the Aluminum Ingot Producing Industry." All but one of the smaller of these firms participated in the study. fact i the cc supple in an ducing from : were , senta cally minim from tribu tion, hai ( Stud: w. . f—w— V____ H_ . A 29 fact feasible,further interviews were conducted throughout the course of the study to provide continuous guidance and supplemental information.' The interviewees were selected hin an attempt to.gain substantial coverage Of the ingot pro- ducing segment of the aluminum industry. Representatives 3 i‘ from selected trade associations and governmental offices were also interviewed. The direct interviews, with a repre- ,sentative sample Of domestic primary producers,were baSi- scally nondirected although an attempt was made to cover_a ndnimum number of aspects. The interviews varied in length from approximately one to four hours; Generally, the interviewees were willing to con- tribute their knowledge to assist in the study.' In addi- tion, they provided a Wealth of information and data, which has greatly assisted in substantiating the resultsof this. study. Although the interviewees lacked accurate histori— .Cal data concerning procurement and inventory levels, it‘ was interesting to note that a substantial number were willing to accept the general theme of the hypotheses as. Presented. They also agreed that there was.a need fOr cur- rent and accurate backlog, procurement, and inventory data for their use in business decisions. 30 A series of questions, as listed in Appendix B, Exhibit 1, served as a guideline for the direct interviews that were conducted; In those cases where the interviewees were not contacted directly, a letter was directed to a specific individual in those firms in which the same ques- tions were asked. An additional part of the data gathering step included a telephone follow-up with those industry members who had not responded to the mail questionnaire. This step was taken so that the results of thestudy would not be biased by a failure to include all industry members as potential participants. This method of contact and follow-up resulted in the inclusion of all primary industry members, except one of the smaller ingot producers Who: elected not to participate in the study. The information gathered in this portiOn of the study provided substantiating evidence to the parameters that were established concerning-conditions existing in the industry during the period of the study, 1959-1968. The bOdy of data coilected is used in later chapters. The aluminum ingot induStry consists of only a small number of producers, and some members desired that they not he identified specifically. This resulted in situations where scurces of information could not be specifically 31 identified. In order to protect the anonymity of the source, certain information has been identified only as an industry source. Collection of Data Of basic importance to the study was a critical review of data collected to establish an estimated degree of accuracy. In the following subsections, the various elements of the data are discussed and estimated levels of accuracy are established. Monthly Production Capacity Year end capacity figures indicating the available reduction capacity of primary producers are published by numerous sources including The Aluminum Association4 and Minerals Yearbook.5 In no case was monthly reduction capacity indicated. In addition to a lack of monthly re- duction capacity data, a number of discrepancies were noted relative to year end capacity levels as published by . 6 . . various sources. These discrepanCies appeared to result g 4The Aluminum Association, 420 Lexington Ave., New York 10017. 5Minerals Yearbook,(U. S. Dept. of the Interior Bureau of Mines, U; S. Government Printing Office, Washington, D. C., 1959 through 1968). . 6Examples of specific discrepancies in data are Cited in Appendix H. 32 from the fact that projected start up dates for new facili- ties were used rather than actual start up dates. Because of these shortcomings, a thorough search of the literature was undertaken to establish capacity figures based on the following criteria: 1. Existing primary capacity was included as long as it was in an Operating plant and _could be placed into Operation during a normal start up cycle. 2. New capacity was included when substantiating evidence was located to indicate that the capacity was actually in Operation. Unfortunately, it was not possible to meet the second objective completely as all start up dates were not located in publications. In those cases where published information was not available, two alternatives were avail- able to establish adjusted start up dates. These two alternatives included first of all an arbitrary selection of a start up at midyear of the year concerned. or second, direct contact with the producers to obtain start up infor— mation. In actuality, both alternatives were used. Industry sources were contacted and in numerous cases start up information was obtained to establish correct Capacity information. This procedure provided information Of all capacity increases of a major size. In those cases where the percent change in total capacity was of a minor size to t mary mari @ tail MED [ROD m m / 33 size, an arbitrary selection of midyear was made. This led to the development of a month end production capacity sum~ mary. The overall results of this capacity study are sum- marized by plant, month, and year in Appendix C. Iuimary Production, ghipment, and Inventory Data Monthly data relative to these three areas were ob— tained from monthly reports as published by the U. 8. Depart» ment of Interior Bureau of Mines.7 These data are based on monthly reports submitted to the Bureau of Mines by all domestic primary producers, on U. 8. Government Form 6-1012mM. Because of the small number of producers along with complete industry coverage, these data are aesumed to be accurate and are included here for reference in Appendix D. §econdary Production, Shipment, and Inventory Data Data concerning these three areas are also published monthly by the Bureau of Mines.8 The data, as published, are a combination of information obtained by the Bureau of Mines from two sources. First, data are submitted monthly to the Bureau of Mines by the ARSI.9 Ml This organization has 7Metals Industry Survey, Aluminum Monthly, Op. cit. 8 . Ibid. 9Aluminum Smelters Research Institute, 20 North WECker Drive, Chicago, Illinois. 34 as its membership, firms which account for approximate— ly 70 per cent of the output of the secondary segment of the alwminum industry. The second source of data is Gov- ernment Form 6—1114—MA, which is submitted directly to the Bureau of Mines by producers and users. This form is sub- Hdtted monthly by invitation of the Bureau of Mines. Secondary aluminum production, shipment, and in- ventory data suffers from probable inaccuracies in at least two areas. One problem area is that quite often only pre- liminary monthly data are published, and corrected final data are either not published until several months later or not published at all. The second problem area is the degree to which this segment of the industry is covered. Because of changing conditions in the market place, users are con- stantly shifting their demand between primary and secondary metal. 'When these shifts occur, the Bureau of Mines, in many instances, fails to request information from some of the users.10 The net result of these problem areas is that these data must be adjudged inaccurate to an indeterminable degree. The data is included for reference in Appendix D. “~- ~—-» ”n- g- *.~——_-~ ~—_~——- lOInterview Mr. McMahon, U. S. Dept. of the Interior, Bureau of Mines, Washington, D. C., January, 1970. Import mitted Census as to l due to tion 0 in App Stock; deliv( Prior gated finan apprc dirir 35 Import and Export Data Information relating to imports and exports is sub= mitted to the Bureau of Mines by the U. S. Bureau of the Census. These data are considered substantially accurate as to quantities, but they do suffer somewhat as to timing due to lengthy periods between time of shipment and comple— tion of all business transactions. The data are included in Appendix E. stockpile Data An attempt to locate monthly data about stockpile deliveries and withdrawals was unsuccessful for the period prior to December, 1965, as government data had been rele- gated to the archives and resources were not adequate to finance a thorough search of these records. Because of this limitation, it was‘necessary to approximate monthly data for deliveries to the stockpile during the period 1959 through 1963 and withdrawals from the stockpile for the period 1963 through November, 1965. As yearly data are available, this approximation was made by assuming a constant rate throughout a given year with slight adjustments so that year end inventories agree with official figures. The extent of this approximation is relatively minor for most of the years, as averages varied between 6920 t( deliveJ pile C1 operat nation produc drawal The ne minor. cent ( 398 W; are i are u Candi 0Me by Cc Depa: Adlai] Wash 36 between a low of 2042 tons per month in 1963 to a high of 6920 tons per month in 1959. The greater portion of these deliveries was made by Harvey Aluminum to meet their stock- pile contract commitments. Their reduction plant started operation in 1958, a time of relatively low capacity utili- zation, and consequently, a very limited market for a new producer. The balance of the data are actual monthly with- drawals as reported by General Services Administration.1 The net effect of using monthly averages is relatively minor. In 1959, stockpile deliveries averaged under 5 per cent of monthly average production, while in 1963, the aver- age was down to approximately 1 per cent. Stockpile data are included in Appendix E. Use of Data Monthly data relative to deliveries and shipments are used in Chapter VI to determine What, if any, irregular conditions exist in the aluminum ingot market. Prdbable causes of these conditions are analyzed also in Chapter VI by comparing data with the Chronology of Significant _g llStockpile information Obtained from the U. S. Department of Commerce, Business and Defense Services Administration, Aluminum and Magnesium Div., Washington, D. C., based on a report of the Stockpile Disposal Divi— sion, Metals Branch, General Services Administration, Washington, D. C. Historh and inv' flan of product 37 Ifistorical Events, 1959—1968. Export, import, production, and inventory data are used in Chapter VII to analyze the flow of aluminum ingot from all sources into the mill products stage. the a indu: "all; to e: Vide (Nan H If; H ls: rt 0 CHAPTER I I I THE HISTORY OF THE ALUMINUM INDUSTRY Significant Historical Developments The discovery of aluminum and the development of the aluminum industry is a classic study of a monOpolistic industry. This has been well documented by Muller,1 2 Peck3 and others. In this study, the intent is Wallace, to extract significant facts from that history which pro- vide factors of importance to current industry conditions. The history of the aluminum industry has been divided by the writer into five stages, each significant because of specific economic and business conditions prev- alent at the time. These five stages are as follows: The Experimental and Discovery Stage, The Process DeveloPment __ 1Charlotte F. Muller, Light Metals Monopoly (New York: Columbia University Press, 1946). 2Donald H. wallace, Market Control in the Aluminum Industry (Cambridge: Harvard university Press, 1937). 3Merton J. Peck, Competition in the Aluminum Industry, 1945-1958 (Cambridge: Harvard University Press, 1961). 38 Stage final by St the 1 incl Denn nent ofa 90m PM he cal Met 39 Stage, The Monopoly Stage, The War Expansion Stage, and finally, The Diversification Stage. The Experimental and Discovery Stage This period in the history of aluminum is dominated by scientists and inventors and their attempts to isolate the metal from its natural state. These early experimenters included Sir Humphrey Davy, who first produced an iron— aluminum alloy in 1809. Following Davy, H. C. Oerstadt of Denmark and Friedrich Wohler of Germany conducted experi- ments in which they succeeded in producing minute quantities of aluminum in the laboratory. The first commercially significant discovery of aluminum was made by Saints-Claire Deville in France in 1854. His efforts led to the establishment of the chemical aluminum industry in France in 1855, and provided that country with an early lead as one of the major aluminum producing countries in the world. Aluminum's high cost ($17.00 per pound in 1859) when produced by the chemical process in France, drasti- cally limited its usage. Commercial exploitation of the metal awaited the discovery of an economic method to reduce the aluminum from its ore, bauxite. A method to accomplish this was discovered in February, 1886, by two men working indepe Martin sane e separa covery an imp ore. step n 8001101] 40 independently, Paul L. T. Hercult in France and Charles Martin Hall in the United States. Both men deve10ped the same electrolytic process by which the aluminum could be separated from aluminum oxide (alumina). A corollary dis— covery by Karl Joseph Bayer in 1888, in Germany, provided an improved process to extract alumina from the bauxite ore. This provided a raw material input to the reduction step which was chemically pure enough to be processed economically. The significance of the discoveries of Hall, Heroult and Bayer is the fact that their discoveries are still in use today. This has provided the aluminum ingot industry vdth stability in the production precess that is required for rapid growth. The Process DevelOpment Stage Domestic exploitation of the Hall process began with the formation of the Pittsburgh Reduction Company (PRC) in 1888. This company was formed by an Alfred E. Hunt, Hall, and the banking interests of T. Mellon and Sons. At the time PRC was being formed in the united States, foreign interests of the Heroult patent were being considered by two companies, Pechiney in France and Aluminumindustrie A.G. (AIAG) in Switzerland. Further < undertaken by PR( America (Alcoa) : to consolidate mt protection of thr addition to the I by the Bradley p with the Cowles early competito during this per' nical problems cess. Lastly. was provided by ducing mill prot PrOducers would efforts led to ‘ sole aluminum p In orde fore final pate Alcoa solidify Control of the and electric pi Purchasing exi 41 Further domestic developments in the industry were undertaken by PRC (changed to the Aluminum Company of America (Alcoa) in 1907). These developments allowed Alcoa to consolidate monopolistic control of production under the protection of the Hall patent which eXpired in 1906. In addition to the Hall patent, protection was provided Alcoa by the Bradley patent, which Alcoa acquired in a litigation with the Cowles Electric Smelting and Aluminum Company, an early competitor. Having the security of patent protection during this period, Alcoa was able to solve the many tech— nical problems associated with the Hall electrolytic pro- cess. Lastly, an outlet for the metal was required. This was provided by Alcoa, who established a practice of pro- A ducing mill products and end products whenever existing producers would not acCept the challenge. These combined efforts led to the establishment of Alcoa as an integrated, sole aluminum producer in the United States. In order to secure its position as a mon0polist be- fore final patent expiration in 1909, it was necessary that Adcoa solidify its production system by acquisition and acontrol of the major factors of production, namely bauxite and electric power. Bauxite control was accomplished by purchasing existing producers in Georgia and the acquisition of 90 percent of 1 A: control followed ; - acquisition of a : ‘ acquisition was fr the St. Lawrence 1 received and smal was finally block United States an endeavor, Alcoa developed an ext In addit' for production a plant in East St aaahighly inte. 1909recession, 4 develop. Internat its Canadian sub which was later Influence was e: cartel formed in w 4Muller 5Wal lac 42 of 90 percent of Arkansas bauxite acreage by 1909.4 Power control followed a similar pattern beginning with the acquisition of a site at Shawinigan Falls in Canada. This acquisition was followed by an attempt to control and dam the St. Lawrence River. Although state approval was received and small land parcels were acquired, this effort was finally blocked by joint action on the parts of the _Uhited States and Canadian governments. Failing in this endeavor, Alcoa turned to the Little Tennessee River and developed an extensive power system.5 In addition to gaining control of electric power for production and bauxite, Alcoa also erected an alumina plant in East St. Louis in 1902. This established Alcoa as a highly integrated firm when patents expired in the 1909 recession, an inOpportune time for competition to develOp. International influence was exerted by Alcoa through its Canadian subsidiary, the Northern Aluminum Company, \flfich was later changed to Aluminium Limited (Alcan). This influence was exerted by Alcan's membership in a world cartel formed in 1901 which included British, French, and __¥ 4Muller, op. cit., p. 40. 5Wallace, Op. cit., pp. 25-26. Swiss interests. ment to control w A complet neither possible nificant here is influence over t1 control of Alcan The Mono ol Sta Between was under the co 1y 50 per cent 0 combined intere as a separate C by Alcoa through industry is an e Muller7 and Wali events pertinen These events in l. Alc ric Gui w 6Mulle1 7;bid . BWaiia 43 Swiss interests. This cartel was an early official agree— nmnt to control world aluminum prices and production.6 A complete review of the world aluminum cartel is neither possible nor necessary at this point. What is sign nificant here is that Alcoa was able to exert extensive influence over the world aluminum industry through its control of Alcan. The Monopoly Stage Between 1909 and 1940 domestic aluminum production was under the control of Alcoa. Furthermore, approximate- ly 50‘percxum.of the world production was controlled by the combined interests of Alcoa and Alcan which was established as a separate Canadian Corporation in 1928, but controlled by Alcoa through joint stock ownership. This period of the industry is an excellent monopolistic study documented by Muller7 and Wallace.8 From this history some significant events pertinent to current conditions have been extracted. These events include the following: 1. Alcoa's search for, and ultimate control of rich bauxite reserves in British and Dutch Guinea between 1912 and 1916. In acquiring 6Muller, 0p. cit., pp. 103-04. 7Ibid. 8Wallace, 0p. cit. the Se the 1 Comp; star Sout cial 1915 9Mulls lolbid llWall 44 these interests, Alcoa was able to overcome the competition of the Southern Aluminum Company, a French firm which attempted to start production in North Carolina. The Southern Aluminum Company failed for finan~ cial reasons and was purchased by Alcoa in 1915. 2. The extension of the world cartel in June, 1912,9 and a further agreement in 1931, which extended cartel arrangements for 99 years.lo In all of these, Alcoa exerted influence through the leading part played by Alcan.ll 3. The control within Alcoa, which was exerted by the Mellon Bank of Pittsburgh because it owned approximately one third of the stock. Also, The Mellon Bank had other commercial interests by which it was able to discourage competition in aluminum. 4. The piston patent pool agreement of March 7, 1922, at which time Alcoa was able to estab- lish herself as the primary supplier of aluminum used for pistons in the automotive industry. 5. The AlcoawDow Chemical Company agreement of 1927 in which Alcoa retained control over aluminum production and Dow emerged as the sole magnesium producer. This domestic pro— duction control was maintained by Dow until 1940. The marketing of magnesium was controlled by Dow, Alcoa and I. G. Farben. Dow marketed the magnesium direct while Alcoa and I. G. Farben marketed the magnesium through 50ml Lmn'cent interest in each of the American 9Muller, op. cit., p. 105. lOIbid., p. 35. llWallace, op. cit., p. 163. Dev Followi prior to 1940, This was achiev tial competitio (bauxite and p development, a taining high f ' against potent' to provide suf characteristic occurring factr Signs < began to appea reduction capa destroying the defendant in a which the feds of monopoliz ir 12Mul. 131ml 45 Magnesium Corporation and the Magnesium Development Corporation. Following the expiration of patents in 1909 and prior to 1940, Alcoa dominated world aluminum production. This was achieved through a policy of acquisition of poten- tial competition, control of major factors of production (bauxite and power), aggressive marketing and product development, and finally, by restricting output and main_ taining high firm prices. At the same time, as a deterrent against potential competition, over capacity was maintained to provide sufficient supply above existing demand. This characteristic of excess capacity has been a continually re— occurring factor in the aluminum industry. Signs of change in world and domestic control first began to appear in 1933 as Germany started expansion of her reduction capacity in preparation for war, thereby largely destroying the 1931 cartel. Domestically, Alcoa was the defendent in a federal antitrust suit filed in 1937, in which the federal government contended that Alcoa was guilty , 13 0f monOpolizing the production of aluminum ingot. 12Muller, op. cit., p. 194. l3rbid., p. 11. World co for additional a Additions to thi Reynolds Metals construction on Listerhill, Ala 1941, and was f Reynolds plant In 1941 need for 3 gr war plane produ plished through and the construn ration. These j ment money but was operated by Preduction from time productior Followi Plants became 2 0(indicated by the plants unt: 46 The War Expansion Stage World conditions in 1939 and 1940 signified the need for additional aluminum capacity in the United States. Additions to this capacity were started in 1940 when the Reynolds Metals Co., which was not part of Alcoa, began construction on its first aluminum reduction plant at Listerhill, Alabama. This plant began producing in May, 1941, and was followed shortly thereafter by a.second Reynolds plant in Longview, Washington. In 1941, the federal government finally recognized a need for a greatly expanded aluminum industry to meet war plane production schedules. This expansion was accom- plished through private industry, namely Alcoa and Reynolds, and the construction of plants by the Defense Plant Corpo- ration. These plants were constructed with federal govern— fimnt money but operated by private industry: all but one was operated by Alcoa. This eXpansion program increased PrOduction from 163,500 tons per year in 1939 to a peak war time production of 1,250,000 tons per year. Following the war, disposal of the government owned ' - ' ‘ as plants became an item of major concern. The.srtuation w complicated by the fact that Alcoa held leases to Operate theplants until 1948. In addition, Alcoa held patents cowering operat' further complic was still pendi the plants to A ultimate soluti assembling of balance. In th divided approxi and Kaiser Al The go of reduction c government int to gain an und industry, it is in the antitrur original case V District Court dilly 23, 1942: was appealed 13 0f Appeals, si M l‘ii‘f‘or alunninum plant Public Adminis Harcourt Brace IIIIIIllllIlllIII--:::—————————————————— 47 covering operating methods in some of the plants. To further complicate the problem, the 1937 antitrust suit was still pending against Alcoa; consequently, disposal of 14 the plants to Alcoa was considered to be illegal. The ultimate solution-to this complex situation was the dis- assembling of unprofitable plants and the disposal of the balance. In the late 1940's total domestic capacity was divided approximately as follows: Alcoa 50%» Reynolds 30%, and Kaiser Aluminum and Chemical Corporation, 20%. -The government program of construction and disposal of reduction capacity was only one of many incidents of government intervention in the aluminum industry. In order to gain an understanding of the structure of the aluminum industry, it is necessary to briefly review the major events in the antitrust suit started against Alcoa in 1937. The original case was decided by Judge Caffey of the Federal District Court for the Southern District of New York on Jhly 23, 1942; Alcoa was absolved of all charges. The case was appealed by the JustiCe Department; and the U. S. Court of Appeals, sitting in lieu of the Supreme Court, found M ~ 1 w 14For a comprehensive coverage of the disposal of aluminum plants following World war II, see Harold Stein, Egblic Administration and Policy Development (New York: Harcourt Brace & Co., 1952): PP. 315’360- Alcoa guilty of and recommended written by Judg tion of Alcoa 0 position of the pleted. The U. on April 23, 19 but allowing t tute further p ingot market 1 given the righ cient competit Further 1950, when Jude longer monopol: conditions, din Knoxstipulate 0f Alcoa and A 15 ether. Fina bringing. to an Fur the w 15Char (New York: Ri IIIIlIlIIIlIIIIII-::7————————————————T’f 48 Alcoa guilty of monopolizing the ingot market as of 1940 and recommended dissolution Of Alcoa. In the opinion written by Judge Learned Hand, a ruling relative to dissolu- tion Of Alcoa on the monopoly count was forbidden until dis- position Of the government owned aluminum plants was com- pleted. The U. 5. District Court entered the final judgment on April 23, 1946, without requiring dissolution of Alcoa but allowing the U. S. Attorney General the right to insti— tute further proceedings on the grpunds of monopolizing the ingot market if an indicated need arose. Alcoa was also given the right to petition the court for relief if suffi- cient competition deve10ped. Further consideration in the case came on June 2, 1950, when Judge Knox filed his Opinion that Alcoa no longer monopolized the ingOt market, and under the existing Conditions, dissolution was not necessary. However, Judge Knox.stipulated-in his decision that major stockholders 0f Alcoa and Alcan.must divest their interest in one or the 15 pther. Final litigation came about in June, 1957, thus bringing to an end a case begun in 1937. Further government intervention came about with the 15Charles C. Carr, Alcoa, An American Enterprise (New York: Rinehart & company, Inc., 1952). pp. 217-236. establishment o purpose of this material in cas was to serve as duced business arrangement whe were allowed t encouragement The fo occurred in th Mobilization i existing produ in the program two main featur 1. An cal 2 Red he 50 This entire pr 0f 446,217, an lively. The i \M 16Phil fliile of an ra P- 27. 49 establishment of the aluminum stockpile program. The avowed purpdse of this program was to provide a supply of critical material in case of a national emergency. In addition, it was to serve as a source of demand during periods of re- duced business activity. This was accomplished by an arrangement wherein new entrants to the aluminum industry were allowed to sell metal to the federal government as an encouragement to enter business.16 The fourth major incident of government intervention occurred in the fall of 1950 when the Office of Defense Mobilization initiated a series of expansion programs. All existing producers and some potential entrants participated in the programs designed to increase ingot capacity. The two main features of the program were the following: 1. An accelerated five year amortization certifi— cate covering 85% of the cost of the facilities. 2. Requirement of the government to purchase from new plants all ingot output which could not be sold commercially. This entire program consisted of three rounds of increments Of 446,217, and 214 thousand tons of annual capacity respec- tively. The first two rounds were completed, but nothing _k l6Philip Farin & Gary G. Reibsamen, Aluminum-« ££Q£il§ of an Industry (New York: McGraw~Hill Inc., 1969), P. 27. of the last roux sion program war In addi‘ capacity that w there are at lie to inventory po aluminum indust tinned threat 0 industry opera and into the f threat has bee both domestica and possible 0‘ been the deve1< By developing effect, a brok buy metal when demand exceede economic tool a“9191.31, and p: Program was d« 'r .- 17Pec‘ 50 of the last round was under construction when this eXpan— sion program was closed in September, 1955.17 In addition to the tremendously large increase in capacity that was built duringithis stage 0f the industry, there are at least two other factors which are significant to inventory policies and procurement praCtices in the aluminum industry. The first of these factors is the con- tinued threat of antitrust action which has hung over the industry operation, particularly Alcoa, during this stage and into the following stage:. The effect of this apparent threat has been to throttle possible competitive action both domestically and internationally on the part of Alcoa and possible other industry members. The second factor has been the development of the government stockpile program.. By develoPing the stockpile, the government has become, in effect, a broker in aluminum; it has been in a position to buy metal when the demand was down and to sell metal when demand exceeded supply. This stockpilebecame an effective economic tool for use in combating fluctuations in demand, supply, and price. .This effective use of the stockpiling Program was demonstrated in 1965: an event which will be ' b 6 17Peck, 02. cit., pp. 148—150. discussed later The Egrpans ion a The se] current stage < no clearly def: posed to what 1 date is predica 1. Ca] th: Estab] current 3 tage ing point for \____..._ 18Joh Harry A. Youn 1965: Its Ef (Unpublished Of Business, 51 discussed later.18 The Egpansion and Diversification Stage The selection of 1959 as the starting point of the current stage of the aluminum industry is arbitrary in that no clearly defined incident occurred at that time, as 0p— posed to what happened in 1940. However, selection of this date is predicated on the following facts: 1. Capacity expansion brought about largely through government programs had been completed. 2. Although some shipments were made after 1958, deliveries to the government stockpile were largely completed by this time. 3. Antitrust action against Alcoa was ended in June, 1957. In this decision, the court accepted the Alcoa-Alcan divesture plan in which major stockholders gave up their hold— ings in one or the other firm. Also, the industry was adjudged sufficiently competi— tive so that dissolution of Alcoa was no longer considered necessary. Establishment of 1959 as the starting point of the current stage of the aluminum industry provides the start- ing point for this study to be detailed in later chapters. 18John A. Haas, Avner M. Porat, Andre H. K. Tan, Harry A. Young, "The Aluminum Price Crisis of November 1965: Its Effect on Business-Government Relations," (Unpublished Report), (Pittsburgh, Pa.: Graduate School Of Business, University of Pittsburghh n.d. At the ing primary me discussion bri ownership of t of December 31 Aluminum Com Alcoa eight primary nastier: Alcoa, Tenness Badin, No. Car Evansville, In Massena, New Y Point Comfort, Rockdale, Tex: Vancouver, Was Wenatchee, Was Anaconda Alumi Anacor Gouda Company 1955 with the faCilitY at C4 52 The Current Structure of the ”Aluminum Iggot Producing Industry At the end of 1968, there were eight firms produc— ing primary metal within the United States. The following discussion briefly summarizes the capacity, location and ownership of these producers. The capacity reported is as of December 31, 1968. Aluminum Company of America Alcoa is a publicly held firm and has the following eight primary producing sites: Date Production Location Capacity Started Alcoa, Tennessee 125,000 Tons/year Prior to 1959 Badin, No. Carolina 100,000 " " Evansville, Indiana 175,000 " July, 1960 ‘Massena, New York 127,000 " Prior to 1959 Point Comfort, Texas 175,000 " " ' Rockdale, Texas a 220.000 " " Vancouver, Washington 100,000 " “ Wenatchee, Washington 175,000 " ” 2mmconda Aluminum Company Anaconda is a wholly owned subsidiary of the Ana- conda Company. The firm entered the aluminum business in 1955 with the construction of a 175,000 tons per year facility at Columbia Falls, Montana. Aluminum Limit with a 140,000 Tennessee . tion facility in 1958 . The Intalco Alumi Intal dale, Washingl Per year in 1‘. three other C! Amer i Home Pechi Intalco does all productio Kaiser Alumin \u 53 . The Consolidated Aluminum Corporation Conalco is a wholly owned subsidiary of Swiss Aluminum Limited. Primary production was started in 1963 with a 140,000 ton per year facility at New Johnsonville, Tennessee. Harvey Aluminum, Incorporated Harvey is a public corporation with a single reduc- tion facility at The Dalles, Oregon which started production in 1958. The capacity is 91,000 tons per year. Intalco Aluminum;Corporation Intalco started a single reduction facility in Fern— dale, Washington with a reduction capacity of 228,000 tons per year in 1966. Intalco is a cooperative venture of three other corporations: Ownership American Metal Climax 5?? Howmet Corporation 2?? Pechiney Enterprises (France) 25A Intalco does not sell metal on the open market, but shlps all production to the three owners. fiéiser Aluminum and Chemical Corpgration Kaiser is a publicly held corporation formed as a Subsidiary of Kaiser Industries. Initial production was started in fac' War II. Since as follows: Location Chalmette, Lou Mead, Washingt Ravenswood, We Tacoma, Washin owned by 01in by Revere Copp tons per year facility at Ha Reynolds Meta] Reyno] reduction of a Current reduct locations: 54 started in facilities built by the government during WOrld War II. Since then reduction capacity has been deve10ped as follows: Date Production Location Capacity Started Chalmette, Louisiana 257,000 Tons/year Prior to 1959 Mead, Washington 213,000 " " Ravenswood, West Virginia 159,000 " " Tacoma, Washington 61,000 " " Qrmet Corporation Ormet is an affiliate, 50 per cent of which is owned by 01in Mathieson Chemical Corporation and 50 per cent by Revere Cepper & Brass. .Production capacity of 240,000 tons per year started in 1958, and is consolidated in one facility at Hannibal, Ohio. Beynolds Metals Company Reynolds was the first firm to start domestic reduction of aluminum outside of the Alcoa organization. Current reduction is carried on at the following seven locations: ---c, ..... Location Trkadelphia, Corpus Christi Jones Mills, Longview, Wash Massena, New Y Sheffield, Ala Troutdale, Ore As pre above are bas capacity at t these figures facility star lzation progr ductive capac capacity on a The or includes the I fabricators, : scrap for use have become a the total vol‘ Thality of pr‘ Proximates th 55 Date Production Location Capacity Started Arkadelphia, Arkansas 63,000 Tons/year Prior to 1959 Corpus Christi, Texas 111,000 " " Jones Mills, Arkansas 122,000 " " Longview, Washington 150,000 " " Massena, New York 128,000 " July, 1959 Sheffield, Alabama 221,000 " Prior to 1959 Troutdale, Oregon 100,000 " " As previously noted, the capacity figures listed above are based on available information and are the rated capacity at the end of 1968. In practically all cases, these figures exceed the potential capacity at the time the facility started in production since enlargement and modern- ization programs are constantly being undertaken. (The pro— ductive capacity per facility and total domestic industry caPacity on a monthly basis is summarized in Appendix C.) Secondarprroducers The overall organization of the secondary producers includes the large sedondary smelters and the non-integrated fabricators, in additiqn'to dealers and brokers who gather Scrap for use by the secondary producers. These producers have become a much greater factor in the overall industry as the total volume of scrap has grown. Furthermore, the quality of product of the secondary-producers closely ap— proximates the quality of product of the primary producers, fi thereby making nary metal. The re. to enlarge capl easy to enter 1 producers and tions where it lish accurate is a general 0 shortage of ca 19 apply- The C} industry previ Thereby foreis in the U. S. r Come about th: panics; Alcan tWe of forei PM as long hellance and; c \ lgFar 56 thereby making secondary metal a cloSe substitute for pri- mary metal. The relatively low investment cost and the ability to enlarge capacity inexpensively makes it comparatively easy to enter production. This fact of a large number of producers and numerous small Operations establishes condi— tions where it is beyond the scOpe of this study to estab- lish accurate capacity figures for the secondary industry. As a general Observation, it does not appear that any. shortage of capacity has or will effect this source of supply.19 Eoreign_§ources Thechanging structure of the international aluminum industry previously discussed, has deve10ped the trend Whereby.foreign producers are becoming a greater influence in the U. S. domestic market. Part of this influence hash come about through an expansion of imports by old line com— Panies; Alcan being the one of greatest importance. This type Of foreign influence will undoubtedly continue to ex— Pénd as long as the foreign sources have a net supply Balance and can import metal into the United States at.a “...—_L 19Farin, 0p. cit., p. 34—47. fi profit. A prim again Alcan, wh metal it produc by foreign prod cussed in detai element has bee consisting of t ducers to the e and transportai This sr with metal pror Conalco, Intalr these firms arr Physical stand; 57 profit. A prime example of a firm in this category is again Alcan, which exports approximately 75 per cent of the metal it produces. The volume and effects of metal supplied by foreign producers to the domestic market will be dis— cussed in detail later. The net effect of this international element has been to open up a substantial source of material consisting of the excess capacity of numerous foreign pro— ducers to the extent that is allowed under present economic and transportation barriers. This source of foreign supply should not be confused with metal produced domestically by foreign firms such as Conalco, Intalco, and others being contemplated. Although these firms are the result of foreign investments, from a Physical standpoint, they are considered domestic producers. STRUCT dustry wi two secti segment. ated to 1: the alumi 'I aluminum serve to Producti the form CHAPTER IV STRUCTURE OF THE PRODUCTION AND CONSUMPTION SEGMENTS OF THE-ALUMINUM INDUSTRY Introduction In this chapter, the structure of the aluminum in— dustry will be reviewed. This review will be divided into two sections, the production segment and the consumption segment. Within these two segments, details will be enumer— ated to provide an introduction to the current structure of the aluminum industry. The objectives in providing this review of the aluminum industry are twofold. First, the discussion should (Serve to illustrate the complexity that exists in both the PrOduction and consumption segments. This complexity is in the form of a relatively large number of production oper— ations required to produce usable products and diverse num— ber of market areas where the metal is used. Second, the discussion should also illustrate they degrees of stability that prevail in the industry. From the Pdeuction standpoint, a high degree of stability exrsts in 58 the basi< usable p1 cessing ‘ used to ; butes of ment are mm in t later se general the pro Staps_ reViEWer Process 59' ~the basic processing by which the ore is transformed into usable products. At the same time these stahde, basic pro— cessing techniques are highly versatile in that they can be used to produce a variety of end products° These attri- butes of stability and versatility of the production seg— ment are compatible with the diverse applications of alumi- num in the consumption segment as will be illustratedin a later section in this chapter. The Production Segment The basic purpose of this section is to provide a general understanding of the production steps through which the product flows and the degree of difficulty of.those Steps. In addition, the industry cost structure will be reviewed, locational factors analyzed, and the limiting Processing Operation will be defined. BEpduction_Stages The production segment of the aluminum industry can be subdivided into five areas. These areas include; first. those steps required to mine, refine, and reduce the ore to pure aluminum; second, the mill products stage; third, the parts fabrication stage; fourth, the end products stage; and fifth, the salvage recovery stage. i third mo: can be f< varying : qibbsite domestic; aluminum portant tropical 0f the 1 Process . the ore then was for the is the f We dc in the 5 Current d(m‘estit pmduCti Sents a 60 Mining. Aluminum, in its natural state, is the third most abundant element in the world. Its ore, bauxite, can be found in various parts of the world in deposits of varying sizes and quality. Currently, only two ores, gibbsite and boehmite, are rich enough to warrant processing domestically. These two ores yield 16 to 25 per cent of pure aluminum and in addition are of low silica content, an im— portant factor in the processing of the ore. Most ores are found at, or near, the surface in trOpical and subtrOpical areas; consequently, mining is one of the lesser important steps in the over-aLLproduction process. The mining process consists merely of removing the ore with power equipment, crushing it into uniform size, then washing and drying it. At this point the ore is ready for the next processing operation. A basic problem of the domestic aluminum industry is the fact that the United States does not have an ade- quate domestic reserve of bauxite. Original discoveries in the Southeastern United States have been depleted and current reserves in Arkansas are limited. This means that domestic producers must be dependent on imports to maintain Production. This factor is of importance because it pre— sents a cost problem, a continuity of supply problem, and finally, a n Cur bauxite frc Australia, are under t are integra tries into their requj Purchase at include An; Al‘ bauxite is °Perations ties in thi cess (dEVe which the 3 t0 produce and driers Step re‘lui: one.quarte Eighth 9011: alumni \ Ufa P W 61 finally a national defense problem. Currently, the various domestic producers receive bauxite from Surinam, Dominican Republic, Jamaica, Guinea, Australia, Guyana, and Haiti. In some cases these sources are under the direct control of the primary producers who are integrated back to the mines. Some of the newer en— tries into the primary aluminum stage currently procure their requirements from the older prime producers under purchase agreements. The producers, who purchase bauxite, include Anaconda, Conalco, Intalco, and Ormet. Alumina Refining. The second step in refining the bauxite is a series of chemical, mechanical, and thermal operations designed to separate the alumina from the impuri- ties in the bauxite. This is accomplished by the Bayer Pro- cess (developed by Karl Joseph Bayer in Germany in 1888) in which the bauxite, coal, fuel oil, soda, and lime are used to produce the alumina through a series of tanks, filters, and driers. The mixture of ingredients in this production Step requires four pounds of bauxite, one—half pound coal, one—quarter pound fuel oil, one—half pound soda, and one— eighth pound lime all combined to produce two pounds of alumina.1 __________________ lPhilip Farin & Gary G. Reibsamen, Aluminum—Profile of an Industry,(New York: McGraw-Hill Inc., l969),p. 20. t l l As in is operated as ducers. As 0: United States by Kaiser, am sumed in the ‘ this situatio established c foreign sourc structed, in S Jamaica .2 m in use today Process disc( alumina, Six- pmmd CrYOlit six to eight Pound of aim The lined tank i uryolite bat \ 2 H b 1.1. (A) /E/ 62 As in bauxite production, most alumina production is operated as a captive step by the primary aluminum pro— ducers. As of 1968, there were eight alumina plants in the United States; three owned by Alcoa, two by Reynolds, two by Kaiser, and one by Ormet. Most alumina currently con- sumed in the United States is produced domestically, but' this situation is changing as alumina operations are being established closer to the bauxite sources. Currently, foreign sources for alumina are operating,or are being con—, structed,in Surinam, virgin Islands, Australia, and ' Jamaica.2 Reduction. As previously noted, the basic process in use today to produce pure aluminum is the Hall—Heroult process discovered in 1886. 'In this process two pounds alumina, six—tenth pound baked carbon, threeehundredth pound cryolite, four—hundredth pound aluminum fluoride, and ‘six to eight Kwh of electricity are combined to produce one pound of aluminum.3 The reduction process is accomplished in a carbon lined tank into which the alumina is dissolved in the cryolite bath by the heat generated in the electrolysis, 21bid., p. 25. 3Ibid., p. 20. The carbc DC curren Periodica cast intc u in the re for use i turns inc ingot, fc insulated in this 1 can be fk Table 2 j Producers are Sign; caters: i with a fe Metal. r. the cycle and gene] 1 fabricat: 63 The carbon is used in the form of anodes and is consumed as DC current is applied to separate the aluminum and oxygen. Periodically, the aluminum is then tapped from the tank and cast into ingot. Mill Products. After the pure aluminum is produced in the reduction stage, it is cast into a variety of forms for use in either captive or independent Operations. These forms include unalloyed ingot, extrusion billet, rolling ingot, forging ingot, casting ingot, hot metal (shipped in insulated ladles), and, finally, shot and notch bar. Once in this form, the metal is in a mechanical state where it can be further processed into various mill products. Table 2 indicates the input—output, and the number of 1968 producers of various types of mill products. Two factors in this stage of the production cycle are significant. ,First, there are approximately 3300 fabri— cators, and second, this is an intermediate stage, which, with a few minor exceptions, only changes the form of the metal. These factors create additional inventory points in the cycle, add to the volume of material to be transported, and generate a large volume of salvage to be reprocessed. Parts Fabrication andggpd Products Manufacture. The fabrication of parts and'manufacture of end products are not .........._— onduct Ou iron Reduc Stage ——__ Unalloyed Extrusion Rolling Ir Forging II casting II Hot Metal Shot & NO‘ \ 3 Dept. of lstratiOn by the f, More then We than c Plants or Contract homogenec by Capt ii} 64 TABLE 2 ALUMINUM MILL PRODUCTS PRODUCERS, 1968 Product Output Mill Numbera From Reduction Product Producers Stage Input to: Output 1968 Unalloyed Ingot Independent Ex- Extrusions -_ truders w/cast houses Extrusion Ingot Extruders Extrusions 177 Rolling Ingot Sheet & Rod Mills Wire, sheet 100b plate, foil Forging Ingot Forge Shops Forgings 52 Casting Ingot Foundries Castings 2771 Hot Metal Auto Foundries C Castings __c Shot & Notch Bar Steel Mills None —— aSource: "Directory of Aluminum Suppliers,“ was. Dept. of Commerce, Business and Defense Service Admin— istration, Washington, D.C. Internal Report, Revised 1970), This is an estimated figure which is complicated by the fact that numerous plants produce more than one Product at one location. BDSA census counts producers in more than one category if production facilities exist in more than one category within one plant. CHot metal is shipped direct from the reduction Plants or salvage plants to automotive foundries on a contract basis. The number of foundries in this category 18 included in the 2771 above. h°m°geneous areas. In some instances parts are fabricated bY Captive operations of the primary metal producers, in some cases as captive two stages put-output consumer. material to E tive uses, existence 1 0de6 form Constantly Metal is ge or is no lo returned to industries“ Clevelopmexit The alUminum in 11119623,4 ls prOducin 65 some cases as independent parts fabricators, and sometimes as captive operations of the end product producers. These two stages of the overall processing cycle act then as in— put—output stages between the mill product stages and the consumer. In addition, they serve as a source of raw material to the salvage stage. Secondary Processing. Other than in its destruc— tive uses, once aluminum has been reduced, it continues in existence in its metallic form and does not return to an oxide form as does iron. Thus, the supply of aluminum is constantly expanding rather than being reduced, for as the metal is generated as salvage from processing operations or is no longer of value in its durable good state, it is returned to a usable form in either secondary or remelt industries. This source of metal has been the basis of development and growth of this secondary industry. The secondary industry's effect on the supply of aluminum ingot is substantial; 580,692 tons were processed in 1968.4 At the same time that the secondary industry is producing and adding to the overall metal supply, it also is highly dependent on the primary industry as a major ___________________ 4U. S. Department of the Interior, Bureau of Mines, Minerals Yearbook~l968.(Washington? U- 5' Government Printing Office),l969. source of dustry is new scrap as high a fabricati to be rep to the cy metal in in each s ally, the industry Various s \ \F l l l l l \ Source: 66 source of supply, as much scrap used in the secondary in— dustry is generated as dross in reduction operations and as new scrap from fabricating operations. It is estimated that as high as 25 per cent of the amount of metal used in some fabricating operations returns to the cycle as new scrap to be reprocessed. This percentage is constantly returned to the cycle. This means that the percentiof secondary metal in the system is becoming a greater inventory factor in each succeeding year as indicated in Table 3. Addition— ally, the level of production activity in the secondary industry is closely related to levels of activity in the various stages of the primary industry due to the rate of salvage generation. TABLE 3 ACTUAL AND PROJECTED SUPPLY OF SCRAP ALUMINUM AVAILABLE FOR PROCESSING BY THE SECONDARY INDUSTRY Period Amount tons 1950—54 1,657,000 1955-59 2,163,000 1960—64 2,852,000 1965—69 3,981,000 1970-74 5,740,000 ———______i Source: Aluminum Smelters Research Institute, 20 No. Wacker Dr., Chicago, Ill. Industry Cc The cost indust ties, sour: eralizatior gorically c small found ment, but 1 PIOduct is In industry, 5 so“ Struci “it Struci mc‘ition pro; tents made prOduCers' Ta] the metal I item Ore tr the reduct; follows: i I l 67 gggggtry Cogt Structure The aluminum industry can be classed as a high fixed cost industry due to the large investment required in facili- ties, sources of supplypand power. However, this is a gen— eralization, and all processing steps should not be cate— gorically classified. As an example, a fabricating shop or small foundry can be started for a relatively small invest— ment, but from an overall nature, the greater volume of product is processed in high fixed cost facilities. In order to project the total economic effect of the industry, it is necessary to develop an estimated average cost structure in the industry. The following theoretical cost structure is developed from previously published infor— t mation projected to current market conditions,plus adjust— ments made due to proprietary information received from producers. Table 4 illustrates the changing cost structure as the metal moves through the various stages of production from ore to a marketable good used by the consumer. At the reduction stages major cost factors per ton are as follows: m Alum Car] Bat] All Lab: Eler OVe] DGp] Pre: Alur Otlh Lain Bap] 0%] Pre: 68 TABLE 4 ESTIMATED AVERAGE COST AND PRICE OF ALUMINUM PRODUCTS ON A PER TON BASIS , Unit Total Delivered Item Cost Cost Price Per Ton Per Ton Per Ton Bauxite — delivered to North America Mining cost 2.00 Processing nil i Transportation 5.00a 7.00 7.00b ’ Alumina Bauxite 7.00/ton x 2 ton 14.00 Soda, fuel, other materials 11.00 Indirect materials 2.50 i Labor (direct & indirect) 5.75 i Depreciation 14.50 Overhead 1.00 b Freight 3.00 51.75 51.75 Aluminum Alumina 51.75/ton x 2 ton 103.50 Carbon & pitch 26.00 Bath materials 12°00 All other materials 20-00 Labor 60.00 Electrical energy 60-00 Overhead 17.50 ' Depreciation 75-00 , Freight 20.00 394.00 520.00 Mill Products Aluminum 520.00/ton x i 1.1 tonC 572°00 l Other materials 10°00 Labor 80.00 Depreciation 40'00 ! Overhead 40'00 d Freight 25.00 757.00 1000.00 x 0th: Lab! Dep: Ove: Fre; $2.00 Prom Weighi ‘35/# items 69 TABLE 4——Continued Unit Total Delivered Item Cost Cost Price Per Ton Per Ton Per Ton Fabricated Parts Mill product 1000.00/ton X 1.25 ton 1250.00 Other materials 10.00 Labor 250.00 Depreciation 30.00 Overhead 60.00 Freight 40.00 1640.00 2000.00e End Product Fabricated part 2000.00/ton X 1 ton 2000.00 Other materials nil Labor 150.00 Depreciation 30.00 Overhead 60.00 . Freight 40.00 2280.00 2500.00e Source: Philip Farin and Gary G. Reibsamen, Aluminum— Profile of an Industry (New York: McGraw—Hill, Inc., 1969), p. 148—156. aTransportation costs can Vary between less than $2.00 to approximately $9.00 per ton depending on distance. bDifference between cost and price unavailable. cEstimated 10% average salvage regeneration in this processing step. A composite estimate of various mill products weighted, by annual sales. Prices range from a low of °35/# for extrusions, .50/# for sheet to .90/# for Specialty items. eEstimated composite. By c leac' ture 70 Cost/ton Per cent Materials 71.50 13.8 Labor 67.75 13.0 Power 60.00 11.5 Depreciation 89.50 17.2 Freight 28.00 5.4 Other, incl. overhead 77.25 14.9 Profit (all stages) 126.00 24.2 Total $520.00 100.0 By comparison, a composite breakdown per ton of all factors leading up to the end product indicates how the cost struc— ture has changed. mm Materials 121.00 5.3 Labor 593.00 26.0 Power 82.50 3.6 Depreciation 227.00 10.0 Freight 149.00 6.5 Other, incl. overhead 270.00 11.8 Profit (all stages) 837.50 36.8 Total $2280.00 100.0 This indicates the relative importance of the various cost factors at the different levels of production. At the reduction stage, fixed coscs of power and depreciation,along with captive sources of bauxite,indicate a need to maintain continued production to absorb costs and thereby maintain a low per unit cost. At the end product stage of the spec— trum, labor and other variable costs become dominant, thereby suggesting adjusted levels of production in line With end product demand. Operation of different levels of the industry according to these different principles resul‘ stage: nique: value: based illus make 1 tion ] Profi‘ Opera- 71 results in widely fluctuating inventory levels between the stages which thereby suggests differing procurement tech~ niques between the levels. The reader is cautioned to bear in mind that the values imputed in Table 4 are in many cases composites based on factors noted. They have been presented to illustrate the approximate comparative costs that go to make up total costs, and in this sense they provide a rela— tion between fixed costs, variable costs, and estimated profits rather than a Specific cost structure of a specific operation. Locational Factors and Transportation Considerations With one exception, transportation costs are a pri— mary factor in determining facility locations in the alumi— num industry. The one exception is the reduction stage. This exception is not because of a lack of a need for trans— portation, but because the need for vast amounts of cheap electrical power takes precedence. Table 5 is a compilation of the estimated volume of basic materials which must be transported in order to pro— duce end products of aluminum. This estimated volume of more than 45 million tons per year indicates the importance of locating succeeding Source: Productj Current: new 5111; “trees million thergy l matiérin: Once the has by IIIIIII:________________________________——_7V 72 TABLE 5 ESTIMATED VOLUME OF BASIC MATERIALS TRANSPORTED FOR THE ALUMINUM INDUSTRY m 1967 Material Volume - Tons Bauxite 13,080,000 Coal 1,635,000 Fuel Oil 817,500 Soda 1,635,000 Lime 408,750 Alumina 6,540,000 Bath Materials 2,180,000 Ingot 3,270,000 Imports 450,000 Secondary production 893,000 Mill Products 5,552,700 Parts 4,441,000 End Products 4,441,000 Total 45,342,950 Source: Values computed from cited inputs in text. production stages as near as possible to preceding stages. Currently, the industry practice appears to be to locate new alumina facilities at,or near,the foreign bauxite sources, thereby, eliminating the need to ship the 13 million tons of bauxite to this country. Because of the energy requirement, shipment of the alumina and bath materials to an available power source is a necessity. Once the aluminum is produced, locational decisions are made by a relative weighting of transportation costs between prod 103 Dete indv tior tro] cent the star the the HO) Pha the bal tin vsu are 73 producing sites, markets, and secondary recovery operations to arrive at the lowest total tranSportation cost. Determination of the Controlling Production Operation Discussions were initiated during interviews with industry representatives to establish acceptance or rejec» tion of the assumption that the reduction phase is the cone trolling phase of the production process. The general cone census was that the reduction operation of production was the major controlling phase, although extenuating circum~ stances existed in numerous cases. Locational factors and the critical input of power were obvious elements to justify the selection of the reduction phase as the critical produc— tion phase. Additionally, the large output per potline as an increment of total output further justifies the selec~ tion, as does the cost structure, which generates the need for continual operation of the production facility. There are specific instances when the reduction phase would not be Classified as the most critical phase in the production cycle. Such instances would include imm balances in fabrication capacity, shortages of transporta~ tion facilities, or other short range problems which usually can be corrected in a shorter time than problem areas in the reduction phase. plet inte acce the (See *Mat and tior lis} Stag alm effé men; and IIIIIIIIT____________________________——ff 74 Although extenuating circumstances exist, and com— plete acceptance of the assumption was not obtained in the interviews, a majority of the peOple interviewed expressed acceptance of the assumption that the reduction phase is the most critical phase in the overall production cycle. 3 (See Appendix B, Exhibit 2) Structure of the Consumption Se ent* , *Material in this section is based on information in Farin5 and published information on the Aluminum Association. I The Major Markets The end uses of a product and the level of produc— . tion of those end uses is the determining factor in estab- lishing production levels throughout the intermediate stages of the industry. An understanding of end uses of aluminum by major markets then is imperative so that the effect of changes in these markets can be used as an adjust— ment factor when making decisions relating to procurement and inventories. For statistical and analytical purposes, the markets ._________________ 5Farin, op. cit., pp. 78—99. 6Market segmentation is established by the Aluminum Association, 420 Lexington Ave., New York City. for a These each The e from categ econc sec01 Prodt life the t duct Whilt tive buil buil the Star Of c Clog 75 for aluminum have been divided into eight categories. These categories are not completely homogeneous in that each category is composed of a variety of end products. The existing homogeneity of the categories seems to stem from two areas. First, from an economic standpoint, the categories relate closely to sections of our national economy and, thereby, provide a basis for comparison. The second area of homogeneity is in the life cycle of the end product. Because of the durability of aluminum, the total life of the end product is controlled by factdrs other than the aluminum itself. Consequently, the period between pro- duction and salvage varies widely between each category, while within each category life cycle variations are rela- tively small. ‘ A brief description of the eight markets follows: 1. Building and COnstruction , This category includes metal used‘in all types of building construction and ranging from high rise commercial buildings to conventional hOmes and mobile homes. Use of the metal in this market is closely related to housing starts and programmed commercial construction. The level Gf‘consumption'and its changes can be predicted rather closely when based an anticipated construction. pr< ma] ti< 76 2. Transportation Approximately one-half of thettotal aluminum con— sumed by the transportation market is used in automobile production. Predictions of usage in this portion of the market can be associated with levels of automobile produc— tion. The other half of this category includes metal used in commercial vehicles and marine and railroad applications; areas which are subject to fluctuations since they are asso— ciated with government programs and capital equipment prov grams. 3. Electrical The major portion of metal used in this categoryyis in cable and transmission towers required for electrical distribution. Its use in this area is in close competition with copper. Predictions of metal usage in this category require considerations of both projected construction and competitive pricing of copper. 4. Containers and Packaging This category is currently in a very dynamic stage in that new uses are being developed. One in particular is the beverage can. In addition, the life cycle in this usage is very short. These combined factors establish this mar— ket as an area which can subject the total market to short range ( 5. with 1. air co: ances, change consum and la CatiOn could tial c desali 7. Ply oi USe, I f 77 range changes in over—all demand levels as the market expands. 5. Consumer Durables Use of metal in this market is directly associated with levels of consumer spending for durable items such as air conditioners, cooking utensils, furniture, boats, appli— : ances, sporting goods, etc. Predictions of short range changes in this market can be related to expected changes in consumer discretionary income. 6. Machinery and Equipment The use of aluminum in this area is relatively stable t and large changes in the future will result from new appli— cations. Currently, there are two areas in which aluminum could establish a strong market and thereby cause a substan— tial change in overall aluminum demand. These two areas are desalination and cryogenics, the science of low temperatures. 7. Export The export market is associated with the overall sup— Ply of metal, including imports, rather than as an end product use. Consequently, the net affects of imports and exports Will be discussed later in this study as a supply factor. 8. Other The "Other" category is established by the Aluminum Cu: _ t hr ba. .4. lIIIIIIIIIIIIII:______________________——E 78 Association consists primarily of defense uses. In defense applications the level of demand and life cycle are subject to relatively wide fluctuations. Predictions of changes in level of demand are subject to domestic and international political activity. Current and Projected Market Shares Table 6 illustrates the current and predicted 3 breakdown of the domestic aluminum market on a percentage basis. TABLE 6 t L CURRENT AND PROJECTED ALUMINUM MARKET SHARE BY CATEGORY k t Actual 1967 projected 1972 Mar 6 Mil lbs. Per cent Mil lbs. Per cent Building and Construction 1915 21.4 2600 20.3 Transportation 1866 20.8 3000 23.5 Electrical 1249 13.9 1850 14.4 Containers and Packaging 866 9.7 1600 12.5 Consumer Durables 844 9.4 1100 8.6 Machinery and Equipment 625 7.0 950 7.4 EXport 657 7.3 700 5.5 Other 940 10.5 1000 7.8 Total 8962 100.0 12,800 100.0 Source: Farin, 92;.2334' p. 83. This St trates import; in mak F—:. s 3 79 This summary of aluminum markets and projected growth illus— trates the need to consider overall market levels but, more importantly, changes in market levels as modifying factors in making purchasing and inventory decisions. inc £01 mat in CHAPTER V CURRENT ALUMINUM INGOT MARKET CHARACTERISTICS Introduction In the two preceding chapters, the history of the aluminum industry was reviewed. In addition to the his- torical review, current production and general consumption conditions were discussed. This preceding review and dis— cussion establishes a framework for construction of aluminum ingot market characteristics from which assumptions can be formulated. This chapter uses the general industry infor— mation of the preceding chapters as a basis to develop ingot market characteristics. Market Characteristics The characteristics of the aluminum ingot market are subdivided into four parts. [The first characteristic that is discussed is price, which is a reflection of compe— tition and profit in the ingot market. The second charac- teristic deals with physical elements, which determine Operating conditions in the production segment of the market. 80 The the the titi Tact 2L1. nan IIIIIIIIZT_______________________________fi 81 The third characteristic deals with inventories, which are the linkage between the production and market segments of the industry. The fourth characteristic deals with compe— tition that the domestic market faces from world production. . Each of these four areas are discussed below. Price Characteristics The homogeneity of aluminum produced by primary manufacturers and the highly comparable quality of product of the secondary industry and foreign sources establishes a condition of very high cross elasticity between producers. This condition has led to uniform pricing generally based on a formula of cost plus profit with consideration for attainment of a desired rate of return on investment. The level of the price is determined by its possible effect on sales and the possibility of government intervention- It also acts as a deterrent to the entry by new producers into the aluminum ingot market. In addition to price uniformity, an attempt is made by the industry to maintain price stability. This price Stability encourages the use of aluminum as it provides the user with a high degree of certainty in long range planning 0f products, markets, and facilities. Based on these industry conditions, the following charac Physic operat effect alumit Which ency, aPPIO tensi facil equip 7’ 7 82 characteristics are established: 1. Overall demand is not responsive to short term changes in price.1 2. The level of customer loyalty is relatively low.2 Physical Characteristics Physical considerations relate to the plant and operating characteristics of the reduction phase, and the effects of these characteristics on the structure of the aluminum industry. The development of additional reduction capacity which was an approximate twenty to thirty year life expect- ancy, characteristically requires a gestation period of approximately three years.3 Factors which necessitate ex— tensive time periods to construct and Operate reduction facilities are power, transportation, financing, and capital equipment. This long leadtime required, coupled with the constantly increasing demand for metal, leads to an effect lSterling Brubaker, Trends in World Aluminum Industry (Baltimore: Published for resources for the future by John Hopkins Press, 1967), p. 63. 2Merton. J. Peck, Competition in the Aluminum Industry, 1945-1958. (Cambridge: Harvard University Press, 1961). pp. 35—36. For a complete analysis of pricing of aluminum ingot, the reader is referred to Peck Chapter IV. 31bid., p. 144. ‘ 7 as ill this 6 17,—‘1 “P Cc that Cest 83 as illustrated in Figure 3. The following consequences of this effect result: 1. The incremental size of new reduction capacity leads to excess supply when the new capacity goes into operation. (A potline capacity varies but is in the range of 40,000 to 50,000 tons per year.) FIGURE 3 COMPARISON OF REDUCTION CAPACITY AND DEMAND CHANGES OVER TIME Demand Capacity Volume Time 2. Erroneous decisions as to timing of additional capacity serves to aggravate supply—demand inequities. Once additional capacity has been constructed, start Up costs become a significant consideration. Peck estimates that restarting a potline requires one to two months at a cost of $1000,000 per potline.4 Currently, the cost would __________________“__ 41bid.. p. 85. fig niq‘ lin Nia rat are ati sta use the trc the the hig EISS Wii pm re: 84 be higher, although the establishment of a specific dollar figure has not been attempted due to new designs and tech— niques. Today the industry uses two general types of pot— lines (reduction techniques). One is called a prebake or Niagara, wherein the carbon electrodes are prepared sepa— rately and are installed in the line when the old electrodes are used up. 'This type of line has somewhat higher oper— ating costs but is relatively simplier to shutdown and re- start. The second type of potline, called a Soderburg, uses carbon electrodes that are made up and baked right in the line. In this type of line, shutdown to change elec- trodes is not necessary, therefore savings in downtime and the prebaking of electrodes reduCes operating costs, but at the same time shutdown and start up costs are substantially higher. I I The preceding explanation would lead to the obvious assumption, which has been substantiated in discussions With industry representatives, that other things being equal, and given a choice, a producer would normally shutdown a Prebake line rather than a Soderburg line. An additional physical factor is the relation of reduction capacity to mill products fabricating capacity Within an integrated firm. A producer would normally have ret ca} cax me1 Sh1 am f1! t'u Dex 85 excess mill products fabricating capacity over reduction capacity in order to meet the total demand for metal, while at the same time having flexibility to produce varying amounts of mill products. It would also suggest that in times of excess demand, prime producers who supply to inde« pendent fabricators as well as their own captive operations must either allocate metal to the two areas or provide sup“ plementary basic metals from the stockpile, imports and secondary sources. In either case, whether the primary producer supplements his supply of metal or whether he allocates his captive supply, he must maintain some physi— cal mill products fabricating capacity in excess of his. reduction capacity. This excess capacity over reduction capacity provides a method whereby the total ingot output can be used. If this were not the case, a producer's one method of using up excess ingot inventory would be by shutting down reduction capacity. Two problems exist in attempting to arrive at the amount of this excess capacity that is in existence. The first problem is that some of this capacity exists as cap— tive capacity of the primary producers and some as inde— Pendent production. The task of measuring capacity at all the physical loaations becomes an insurmountable project beyi dem pro How thr usa phy the The poi the den fut 86 beyond the scope of this study. The second problem is the correlation of a specific type of mill products fabricating capacity with end product demand. As long as the metal remains in a basic form as produced at the reduction plant it can be used to produce a variety of mill products and practically all end products. However, the same is not true after it has been processed through the mill products stage. After this step, its usage in a variety of end products is limited due to physical form. The result of this analysis leads to the observation that although excess capacity exists in a physical sense, it may not be of a usable nature in a production sense.5 The possible effects of problems of excess capacity are pointed out by Merton J. Peck when he says, WEven though the excess capacity may be in large part a temporary reces— sion phenomenon, the existence of closer balance between demand and supply seems likely to alter substantially the future pattern of market behavior.”6 The foregoing summary leads to the establishment of the following characteristics: ____________________ 51bid.. pp- 93—94. 61bid., p. 165. Invent. of the tion r; period: and du: will e: are re; Contim ence e: Thege 3 inflat: “W s] rather tories 87 l. The aluminum industry is faced with a con- tinuous problem of imbalance between supply and demand. 20 The cost structure of the reduction stage leads to a tendency to maintain constant output levels at the reduction stage. Inventory Characteristics The physical characteristics of the reduction stage of the industry leads to operations at a constant produc— tion rate. This results in a condition where, during periods of business expansion, inventories will contract and during periods of business contraction, inventories Will expand. Also, two additional conditions exist which are relevant. One is the fact that the industry faces a continual growth in demand. Secondly, a substantial differ- ence exists between the marginal cost and price of aluminum. These factors combined with the prospect of a continual inflation trend and easy storability suggests that produc— tion should be maintained and inventories accumulated, rather than production shut down in period of excess supply.7 Counteracting the tendency to accumulate inven— 8 tories is the cost required to carry them. Two of the ~___________________ 7Ibid., p. 88. ' ' ' ts see: 8 l 815 of inventory_carrying cos G. W. PlOEgI :Edaga W. Wight, Production andgépyenégrysz-S6 9222£2l (New Jersey: Prentice—Hall, Inc., , natu not redu only love rela assu capa per dUCe the down the am that ho a Capo 88 major elements in these carrying costs are interest on investment and storage costs. In the case of aluminum, storage costs are of lesser importance due to aluminum's nature. It does not deteriorate readily in weather, it is not subject to obsolescence, nor does it decompose. In its reduced state, it can be stored outside; consequently, its only storage requirement is security. On the other hand, investment and interest on investment are major elements relative to aluminum inventories. As an illustration, assume that a new facility comes on stream with an annual capacity of 100,000 tons. At an estimated cost of $394.00 per ton,9 a producer could accumulate an inventory of over $3 million in just thirty days. Based on the foregoing, it is assumed that a pro— ducer would continue to produce and store inventory up to the point where carrying costs are counterbalanced by shut- down and restart costs. The higher the cost of capital, the lower the inventory accumulatiOn. In addition, avail- ability of capital becomes a further limiting factor in that complete exhaustion of available capital leaves a firm no alternative but to close down sufficient reduction caPaCity to discontinue further inventory accumulation. 9See Table 4 for method used to compute cost. World l stricti alumim a curre duo or of an ( tion w: lishing Practil firm, 2 excess COHdit: / *0 ca "0' H - O I-h ,_. ,4. O ,_. 89 World Production Characteristics World market conditions and individual country re= strictions have a detrimental affect on the free flow of aluminum between countries. These restrictions have led to a current practice of replacing cartel organizations with a duo or tri consortium. These consortium usually consists of an old line United States and/or European firm in conjunc— tion with a domestic firm in the second country, thus estabw lishing an outlet for the external firm. Although this practice leads to assurance of a market for a specific firm, at the same time it tends to develOp a condition of excess world capacity.lO These world conditions lead to the establishment of conditions as follows: 1. A position as a net exporter is an indication of an oversupply condition. 2. Producers try to pre-empt local markets thus creating a general condition of oversupply and the need for producers to establish world Wide production facilities. Mm lOPhillip Farin and Gary G. Reibsamen, Aluminum969) PrOfile of an Industry,(New York: McGraw=Hill, Inc., J Pp- 106—113. alum: produ alum: deli' is tl all : Phys; prOdl I athl 3ch of f, Easi 9O __§ud“ Assum tions The preceding discussion of characteristics of the aluminum ingot market leads to the following assumptions: Assumption . Given the conditions of a homogeneous product and equal price, a purchaser's selection of an aluminum ingot source of supply is a function of quality, delivery, and service. The signification of this assumption is that, from a price standpoint, all markets are open to all sellers. Assum' . he high fixed cost structure and physical operating characteristics of the aluminum ingot production segment encourages Operation on a constant rather than a variable basis. Assumption III. Aluminum ingot producers will accumulate inventories to the extent cost and availability Of funds allow. Assumption_gg. Domestic aluminum markets are easily penetrated by foreign producers. Mann. ... . ditions 1959 th: series ‘ seasona of all ' CYClica Will be tiCe to deliver the Pro ingot, Primary P“duet prOQeSS CHAPTER VI ALUMINUM INGOT DELIVERIES AND SHIPMENTS: l959~l968 The purpose of this chapter is to analyze the con« ditions which existed in the aluminum ingot market from 1959 through 1968. The analysis will be based on a time series with a specific objective of identifying secular, seasonal, and cyclical patterns and irregular conditions. In conducting the analysis, definitions will first of all be established. Second, secular, seasonal, and CYclical trends will be analyzed. Third, other conditions Will be identified and evaluated. Definitions of Delivery and Shipment Data Within the aluminum industry, it is a common prac- tice to speak of deliveries. The industry defines these deliveries as shipments from the final stage controlled by the producers. These deliveries include metal from the ingot, mill products and parts fabrication stages of the primary producers. (See Chapter IV Section entitled, "The PrOduction Segment"). In most cases, this metal is Processed through additional stages of the production 91 segme to th ital deliv ingot secon ports prime subtz inter film thei dUCe both exp0 9939 Iela mGas 92 segment by independent fabricators before it is delivered to the ultimate user. Total Deliveries Total deliveries are a summation of all metal deliveries to the mill products stage from all sources of ingot. These data are calculated by adding primary and secondary ingot shipments, primary and secondary ingot im- ports and finally stockpile withdrawals. From this total, primary and secondary exports and stockpile deliveries are subtracted. In this report, the term deliveries will be used interchangeably to mean the same as total deliveries. Shipments In the following analysis, shipments are denoted as the total amount of metal shipped by domestic primary pro— ducers from the reduction stage. This metal is shipped to both captive and independent operations. It also includes eXports and stockpile deliveries. Comparison of Shipments and Total Deliveries The two measures defined above differ because they relate to two phases of the aluminum industry. The first measure, shipments, is a quantitative indication of the amoun the d deliv the a stage from an ir comes actix tion the g ment] Vari Mont haVe Trad days 93 amount of metal produced and shipped by the ingot stage of the domestic aluminum industry. The second measure, total deliveries, is also a quantitative measure. It indicates the amount of metal used in the subsequent mill products stage. The shipment measure can be considered as an output from one stage while total deliveries can be considered as an input to the next stage. Another difference that exists between these two comes about because shipments are an indication of domestic activity only, while total deliveries take into considera— tion the net additions to supply from imports and exports, the government stockpile and scrap regeneration. The monthly data of both measures are included for reference in Appendix F. Variations of Monthly Patterng Recognition is given to the problem of monthly variations in deliveries and shipments resulting from a varying number of trading days in each month. In order to eliminate the effect of varying trading days in each month, the data, covering both deliveries and shipments, have been established on a tons per trading day basis. Trading days are computed by subtracting Saturdays, Sun— days, and holidays from the total number of days in each montl montl range tion: of a« diff! seri cove the dust tol PrOg agai 94 month.1 This step results in data which reflect month to month short range fluctuations without camouflaging long range trends. In addition, recognition is given to varia— tions which might come about because of the differing basis of activity in the shipment and production areas. This difference is the result of operating shipping facilities on a trading day basis while production is Operated continu- ously 24 hours per day every day in the month. Trading day adjustments are the only adjustments made to the data. Analysis of Delivery and Shipment Patterns g The basis of the following discussion is a time series analysis of aluminum ingot deliveries and shipments covering the period 1959 through 1968. To reiterate, 1959 was selected as the beginning of the current stage in the development of the aluminum in— dustry because of basic changes which occurred just prior to 1959 in the areas of government sponsored expansion programs, the stockpile program and antitrust action against Alcoa. lHolidays is to be excluded were established by the writer based on work day information available from the aluminum industry. This holiday allowance covers labor contract obligations. and was clu mad occ pos tha 196 men pat 196 dai plc day ref 95 Analysis of Long Range Trends In an initial plotting of average daily deliveries and shipments, a definite change in the trend in mid 1960 was clearly evident. In order to adjust from this change in trend, delivery and shipment data prior to 1960 was ex— cluded from the trend calculations. This adjustment was made on the assumption that a definite change in the market occurred. The cause of this change is not verified, but it possibly is the result of the changes, enumerated above, that occurred just prior to 1959 in conjunction with the 1960—1961 business decline. The calculated trend lines of deliveries and ship— ment using the least squares method are plotted in Figure 4.2 These trend lines clearly illustrate the linear growth pattern that has occurred in the aluminum ingot market from 1960 through 1968. In addition to the trend lines, monthly average daily total deliveries and shipments of aluminum ingot are plotted in Figure 4. These provide a visual presentation of total delivery and shipment data, adjusted for trading day variations but including secular, seasonal, cyclical, 2Calculations of trend lines are included for reference in Appendix G. and bee slo fer A1< Cu: ti: l9£ 96 and irregular patterns. Figure 4 shows that both total deliveries and ship- ments have increased in a linear pattern during the period from mid 1960 through 1968. In addition, the existence of several short range fluctuations are clearly indicated. The nature of these fluctuations are discussed below. An additional factor is apparent in Figure 4. This is the fact that total deliveries and shipments have not been increasing the same as indicated by the different slopes of the two trend lines. The reasons for these dif— fering slopes are assumed to be caused by a greater amount of secondary metal, larger stockpile withdrawals, and an increased level of imports over exports. Quarterly Fluctuations It is a common practice within the aluminum industry to speak of traditional seasonal deliveries on a quarterly basis with the second quarter being the highest, followed by the first quarter, fourth quarter and third quarter in descending order.3 In the following analysis of total 3The existence of the seasonal pattern was suggested by Dr. Stanley Malcuit in an interview December 29, 1968, at Alcoa, Pittsburgh, Pa. Also, the Aluminum Association dis- cusses the existence of seasonal patterns. "Aluminum Sta— tistical Review 1968." (New York, The Aluminum Association, 1969b p. 46. ‘ pr . QWOHIMnMH ugh-fir! EH4 4! 2 Elana-00 tw‘nn OZHE INA §ZH éH—fiud‘ l0 MEGAQHEM g WHHHEHNQ trflk‘fiu NU§N>< V EHN OOOQN 97 influx; ' a nu O a. . .,....._-..I._ : huv .mruunhulnvn . 3:013:- 0930: I .... _, I I I III I m I -I . T I. I In! inf—05 H I. “mm. “mm“ wmmwmmw mm www.mnwmmmm 3; ...—"5 on: I. . «new use Old—vinatu .... IIu.l.1. ... ufi_$€,..flams .«Nfl. _ N... H... \ . ... .. I) ... n: 95.51 Eu . I I. 11%. .\\\\+.\H\\.,\II:_.._WH.1,II ..III IwI IIIIIZ . II. I.I rI’lII... . . IHNITNHHJHMF H . I IIIIIIIIII . I I I I I l I I . I ouzw'nu'u ' ' i I . ..., ....aotiwsawutstug a: .Vr I . I 88 /. I 082 , I.... .II.. as: I .,. 0003 I l j 1 ‘,__ ... 333.32qu I . . I: . . o8: ..... m. .....IIIIIII.I.I.I 82: coo?“ H . IJ .III.I..I 8.2 gibbon: tang I Mm?— mmeIQmMH RENE 5H4 fl 2 gnaw-OD .mfln GZHE BOOZH §H§R< ho MFZHZAHEm 92¢ MHHMEQNQ .flHH‘D NU§N>1 v NEHM OOOQN (also amp“; in; paunrpv) Ana :94 Iqu, i I i I I } delive a dete quarte terly dustry factor measur the la Produc any se Would referz not p: a Peri tion a ming I delive Using frOm 1 and be 98 deliveries and shipments, attention will be directed toward a determination of whether or not a pattern does exist on a quarterly and/or monthly basis. In analyzing ingot total delivery and shipment quar~ terly patterns and comparing them with the suggested in— dustry quarterly pattern it is necessary to consider the factor of leadtime. Ingot deliveries and shipments are a measure of the amount of metal available for processing in the later mill products and parts fabrication stages of the production cycle. Because of leadtime between the stages, any seasonal patterns in ingot shipments that might exist would very likely not coincide with seasonal patterns as referred to by the aluminum industry. However, this does not preclude the possibility of similar patterns, offset by a period of time equal to the leadtime between ingot produc- tion and the shipment of mill and fabricated products. Using total deliveries as identified above and sum— ming by quarters, Table 7 has been prepared showing the delivery pattern for each of the ten years of this study. Using the suggested industry delivery pattern of a sequence from the highest quarter to the lowest quarter of 2—1—4-3, and barring the occurrence of short range fluctuations, we Would expect to find this sequence (2—1-4-3) in a majority of the this se of the with t} quartel Year 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 OCCurr inate . 99 of the years under study. It is interesting to note that this sequence does not occur in the entire ten year period of the study, although the second quarter does coincide with the industry suggested pattern, as the dominate highest quarter. TABLE 7 AVERAGE DAILY TOTAL DELIVERIES OF ALUMINUM FROM THE INGOT STAGE RANKED BY QUARTERS, 1959—1968 ADJUSTED FOR TREND Second Third Year Highest Highest Highest Lowest Quarter Quarter Quarter Quarter 1959 2 3 l 4 1960 l 2 3 4 1961 4 2 3 l 1962 2 3 l 4 1963 2 4 3 l 1964 2 l 3 4 1965 2 4 3 l 1966 2 4 3 l 1967 4 1 2 3 1968 l 2 4 3 Following the same pattern as above, Table 8 has been prepared showing shipments of metal from the primary PrOducers only. Here, we do not find the industry pattern Occurring either. In neither case does a sequential pattern predom— inate. From a total delivery standpoint a specific sequence AVE tear 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 Table Shipme COnsis delivE COHCQI 0n the 100 does not occur more than three times in the ten year period. From a primary metal shipment standpoint no sequence occurs more than twice. TABLE 8 AVERAGE DAILY SHIPMENTS OF ALUMINUM INGOT FROM PRIMARY DOMESTIC PRODUCERS RANKED BY QUARTERS, 1959-1968 ADJUSTED FOR TREND Second Third Year Highest Highest Highest Lowest Quarter Quarter Quarter Quarter 1959 2 3 4 l 1960 1 2 3 4 1961 4 2 l 3 1962 2 l 3 4 1963 2 4 l 3 1964 2 4 3 l 1965 4 2 l 3 1966 4 2 3 l 1967 4 l 2 3 1968 1 4 2 3 A further evaluation of shipments is included in Table 9 where the high and low average daily deliveries and shipments on a monthly basis are tabulated. No month is consistently high as a month where the highest average daily deliveries occur. As far as average daily shipments are concerned, December is the predominantly high month. On the Opposite end of the spectrum. no month is predominant O 1968 aSt trac' parz‘ higl CaSI Cid. thi thu the 101 TABLE 9 TABULATION OF HIGH AND LOW MONTHS OF AVERAGE DAILY DELIVERIES AND SHIPMENT, 1959—1968 ADJUSTED FOR TREND Total Deliveries, Primary Shipments Year Tons/Trading Day TonsZTrading Day High Month ,/ Low Month High Month / Low Month 1959 June January May January 1960 March July February July 1961 December January December January 1962 May August December August 1963 June January December January 1964 March July December July 1965 December June May June 1966 April August April August 1967 December August December August 1968 March July December July as the month with the lowest deliveries or shipments per trading day. One further analytical step that was made was a com— parison of the high and low months with their respective high and low quarters. Of the twenty possible comparisons 0f high month and high quarter, in twelve out of twenty cases the month of highest deliveries or shipments coin- cided with the highest quarter. Less correlation occurred as far as the low month and low quarter are concerned. In this case only seven out of a possible twenty COlnClded, thus indicating a substantial degree of variability in the level of monthly activity. seque lacki cate a ran above occur By Oh there in De Janna is ta in e: ties dete indiI f01.11 102 This analysis fails to establish the existence of a sequential quarterly pattern of ingot shipments. Although lacking evidence of a sequential pattern, these data indi— cate a pattern dominated by the second quarter, followed by a random distribution of the remaining three quarters. Year End Fluctuations. In the previous discussion above it was noted that peak deliveries and shipments occurred with the greatest degree of regularity in December. By observing this phenomenon in Figure 4, it is clear that there is a definite pattern of high deliveries and shipments in December followed by a corresponding drop in activity in January. The extent of this change in the level of activity is tabulated in Table 10 and indicates average fluctuations in excess of 11 per cent over the two month period. Reference to the existence of these year end activi— ties was included in the industry survey in an attempt to determine a causal relationship. The results of the survey indicated that this condition existed basically for the following reasons:4 1. Numerous states have year end inventory taxes. Tax on any material in transit at year end out of these states can be aVOided by haVing 4 n I - Industry Survey, See Appendix B, Exhibit 2. 1959-60 1960-61 1961-62 1962-63 1963-64 1964-65 1965-66 1966-67 1967-68 1968- Ave \ 103 TABLE 10 A COMPARISON OF PER CENT CHANGE IN AVERAGE DAILY DELIVERY AND SHIPMENT ACTIVITY IN DECEMBER AND JANUARY, l959~l968 Total Average Average Domestic Daily Deliveries Primary Shipments Year % Dec. % Jan. % Dec. % Jan. over under over under November December November December 1959-60 15.3 14.3 9.0 10.6 1960—61 1.9 14.1 7.1 20.5 1961-62 16.5 21.2 17.8 20.1 1962-63 9.9 12.0 17.2 21.7 1963-64 13.5 14.1 17.8 17.2 1964—65 4.8 8.3 5.1 8.0 l965~66 10.2 3.0 7.1 3.8 1966—67 6.9 3.4 6.7 1.8 1967—68 23.4 12.1 20.8 14.3 1968- 16.8 —— 12.7 —— Average 11.9% 11.4% 12.1% 13.1% material in transit before the year end.5 2. The producers, in order to present an improved condition of sales for a given year, increase activity in December to raise the total sales volume for the current year. This, in effect, robs shipments from January of each succeeding year. 5This cause has not been verified in the study. It does provide a logical cause for the year end fluctuation, but at the same time raises additional questions relative t0 the ability of the industry to handle the additional Workload. Also, a short range fluctuation of this magnitude would create a substantial demand on transportation facili— ties. which could be beyond the capability of the tranSporta- thn industry to handle in the short time period available. 61bid. Contract visual in which occ 1963, 196 a peak sc followed Finally, fourth qI Z the seas( and Vari: than the the resu these ex the alum t0ries, t interrup from la}: F1 % induSEry dure Wit 104 Contract Termination Effects In addition to the year and seasonal pattern, visual inspection of Figure 4 indicates a wave pattern which occurs with some regularity in the years 1959, 1962, 1963, 1964, 1965, 1967, and 1968. This pattern illustrates a peak sometime in the first or second quarter of the year followed by a rapid drop in deliveries and shipments. Finally, a return to a normal level occurs in the third or fourth quarter. Although these cycles have a gross relationship to the seasonal pattern that the industry projects, the extent and variability of these cycles appears to be far greater than the fluctuations that would be expected if they were the result of a change in demand. A factor which appears to be the probable cause of these extensive fluctuations is a threat to the supply of the aluminum which would necessitate a build up of inven- tories to protect users. A major form of threatened supply interruption is possible production shutdowns resulting from labor contract terminations. Fluctuations Caused by Labor Contract Negotiations. The structure of labor contract negotiations in the aluminum industry is basically an industry wide negotiating proce— dure with two major unions. These two unions are the ' i United CIO, a1 affiliz concur cent pI carrie produc indust were b. teams, produc alumin is app Occur IElati labor eXists SuPply tions metal. follo“ 105 United Steelworkers of America (USA),affiliated with the CIO, and the Aluminum Workers International Union (AWU), affiliated with the AFL. Actual contract negotiations were usually carried on concurrently between the industry and both unions in adja— cent physical locations. These concurrent negotiations were carried out by teams of negotiators representing the producing firms involved, with Alcoa generally acting as industry spokesman. While the industry—wide negotiations were being carried out between industry and union negotiating teams, local negotiations were carried on between individual production facilities and local union representatives. The termination dates of labor contracts with the aluminum industry are plotted on Figure 4. From this, it is apparent that a pattern of short range fluctuations does occur preceding and following these termination dates. In relating these fluctuations to historical data relative to labor contract negotiations, a high degree of relationship exists between these threats to the interruption of the supply of aluminum and the resulting short range fluctua— tions in the average daily deliveries and shipments of metal. A detailed analysis of each threatened interruption follows: Wrmtdrimh&a HntCtt dpdtl 106 1. l959——Contract expiration date was July 31. No agreement was apparent between the aluminum pro— ducers and unions as the termination date approached; thus the threatened interruption continued. Finally, on July 28, an agreement was reached, extending the existing contract until November 1 or 30 days after the current steel contract negotiations were completed, whichever occurred first. Final agreement was reached on December 19, when a three year contract expiring on July 31, 1962 was approved. The net effect of this threatened supply inter— ruption was a period of above normal shipments ex- tending from March through July. These above normal months were followed by a period of below normal activity from August through October. 2. 1962——COntract expiration date was July 31. Negotiations were begun with the Unions on May 15. These negotiations proceeded successfully with the USA and an agreement was reached on June 29 on a two year contract. This agreement was completed approxi— mately one month ahead of the termination date. Nego— tiations with the AWU were less successful and negoti— ations were suspended on June 1. These talks were resumed on July 8, but no settlement was reached by the July 31 termination date. On that date plants represented by the AWU were closed by strike. Final agreement was reached a few days later on August 2, after which the struck plants were immediately reopened. The effect of the 1962 negotiations caused above normal shipment activity starting in March and below normal conditions existing until November. In addi— tion, these contracts of 1962 carried an important clause allowing reopening of the contract in 1963, thus establishing another threatened interruption to the metal supply in the following year. 3. 1963——The reopening date for contract negoti— ations was July 31. Informal talks began between the producers and the Unions early in 1963. These informal discussions continued until July 31, at which time the two year contract of 1962 was extended until July 1, 1965. OffiCe 107 Although these discussions were not of a formal nature, the threat of a strike did exist during a portion of the time, thus necessitating hedging action on the part of aluminum users. Specifically, above normal shipment activity was apparent from March through June and below normal activity in July and August. 4. l965—-Contract expiration date was June 1. In April, the steel industry and the United Steel Workers agreed to postpone their steel contract termination date from May 1 to September 1. This led to a unique situation in that, for the first time, aluminum negotiations preceded steel negoti— ations. Actual negotiations in aluminum were opened on April 29 with the AWU. Agreements were reached on May 31 with the USA and on June 1 with the AWU, after a brief walkout by members of the AWU. This threatened interruption to the supply of aluminum in 1965 resulted in above normal shipment activity during April and May and below normal activity from June through August.7 5. l968——Contract expiration date was June 1. Initial labor contract negotiations began on April 11 amid reports of strike hedge buying and stock- piling. Failure to reach agreement with the AWU resulted in the shutdown of approximately 800,000 tons of capacity on June 1. This strike continued for approximately two months with final settlement being reached in August. The 1968 labor contract negotiations resulted in the most extensive shipment fluctuations in the ten year period of the study. Pre—strike hedge buying began in February and continued through May with a peak being reached in April when it was approximately 12 per cent above the February level. Following the 7U. 8. Dept. of Labor, Bureau of Labor Statistics, Wage Chronology, Aluminum Company of America, 1939-1968. Bulletin #1559, Washington: U. S. Government Printing Office, 1967. HA,“ labor this s the e) year i delive the ye tween tions by ant Strike OCCaSj BeCaus on the built Shutdc \ Pany c 108 contract termination, average daily deliveries and shipments dropped below normal, partly due to the strike shutdown in June and July and partly due to excess inventories. Deliveries, and shipments did not return to a normal level until November; thus the labor contract negotiations of 1968 resulted in abnormal delivery and shipment levels over a total period of nine months. In summary, in each of the five occurrences of a labor contract termination during the ten year period of this study, the same pattern developed. Table 11 summarizes the extent of these fluctuations. On an average, in any year in which a labor contract was negotiated, abnormal delivery and shipment activity occurs during 7.6 months of the year. The range of this abnormal activity varied be- tween five and nine months. The preceding discussion applies only to fluctua- tions in deliveries and shipments, which are brought about by anticipated production shutdowns resulting from threatened strikes. In addition to anticipated strike shutdowns, occasional unanticipated or "wildcat" strikes do occur. Because they are unexpected, no hedging action is possible on the part of users, hence no pre-strike inventories are built up. The effects of these unanticipated production shutdowns are quite different from anticipated production 8Interview Dr° Stanley Malcuit, The Aluminum Com— Pany of America, Pittsburgh. Year 1959 1962 1963 1965 1968 Averag \ Shutd< Chapte PrICe idbOr OCCUr: appea: relat 109 TABLE 11 FLUCTUATIONS IN AVERAGE DAILY DELIVERIES CAUSED BY LABOR CONTRACT NEGOTIATIONS IN THE DOMESTIC ALUMINUM INDUSTRY FOR SELECTED YEARS, l959~1968 Average Fluc— Average Fluc- Months of tuations of Months Be~ tuations of Year Above Normal Average Daily low Normal Average Daily Activity Deliveries Activity Deliveries Preceding Per Month in Following Per Month in Termination Tons Per Day Settlement Tons Per Day 1959 5 1625 3 808 1962 5 655 4 769 1963 4 550 2 400 1965 2 1325 3 400 1968 4 1825 6 2179 Average 4.0 1196 3.6 911 shutdowns. They will be reviewed in detail later in Chapter VII. Price Change Fluctuations Beyond the extensive fluctuations resulting from labor contract negotiations and the seasonal fluctuations occurring at year end, additional fluctuations occur which appear to have a relationship to price increases. This relationship seems to follow a pattern of increased deliverie price inc This resu used up b level. T this phen producers for a Spe announcem operates announced date new Second, a 1Onger be Shipments ment of t T ten Year attempted Shows the effective which had 0 EIT_________________________________‘_i 110 deliveries and shipments prior to the effective date of a price increase followed by a period of depressed activity. This results in increased inventories, which then must be used up before deliveries and shipments return to a normal level. This section will be directed toward an analysis of this phenomenon. When prices are increased by the aluminum producers, it is a common practice to allow price protection for a specified period of time following the date of announcement of the increase. Mechanically, the procedure operates in the following manner. First, an increase is announced and an effective date is established; after this date new orders will no longer be accepted at the old price. Second, a date is established after which shipments will no longer be made at the old price. This effective date on \ shipments is normally thirty days after the date of announce— ment of the increase. There were twelve price changes announced during the J ten year span of this study. The details of these twelve attempted price changes are summarized in Table 12, which shows the date of announcement, the amount of change, the effective dates of orders, and additionally, the firm(s) which had the initial responsibility for the price change. Of the twelve attempted price changes, two were \mmwgv HUHMWAW BOMVZH EHEQQ OHM—..HnHEWBEflV HMO “gm AN N 1H “MN-Hmdwh... lll Em .moflumfim mo mammfioo Esssgad .3503: mwasmum .Ho "wousom moons an omumeHcH moms mass m oso. + woos am: am mooad MQ moo. 0p Umosowm umsuo an ooumauncH woos .cmo ma oHo. + moms .qmo NH .u.>ow an pwuuonm uwsuo an ooumauHcH I: moo. + moms .uoo om mocha an omumnuflcH woos .>oz ms moo. + woos .>oz oH umEHO ma ooumfluflsH coma mash ma moo. + vooa mono w mooam ma owumnuncH woos .ums m moo. + woos comma e movam ha nouuonfi moaocmom an counsuflcH 1: oHo. + woos .cmo ma moons an owuuons meflmm an omumfiuHcH II oao. + moma .omn m monomsom an oouMnuHcH moms .uoo m moo. + moms .ummm mm “muses an omumfluflcH Noon .omn m mHo. : moms .omn N amoH< an ooumHuHaH Homa .umwm mm omo. I soon .umom mm amass mp omumfluHcH mmoa .oon ms mso. + omma .omn ma wmsmno omcmno moflum canon Mom ucwfioocsocnfi Hoodoonm mo mama omcwso oofium mo mama 0>fluommmm mo HQSOEd mwmfllmmma 632ch monm soozH EHEDQ gasses mo wmgpm 4 NH mamdfi II. decreas analysi have an any heé Two of 1964, u announc 1965, u the an: industr not ger ever, t results in havi Stockpi orderly tons by mum yea to be W \ the alu 112 decreases and, consequently. they are excluded from the analysis. The price decreases are excluded because they have an immediate effectivity, therefore buyers do not take any hedging action. In addition, three were unsuccessful, Two of these failures, December 5, 1963, and January 16, 1964, were the result of Alcoa's failure to support the announced increases. The third failure on October 29, 1965, was the result of government intervention to prevent the announced increase. The details of the activity on the parts of the industry and government which led to the 1965 failure are not germane to this study and are not detailed here; how— ever, the net results of the action are of concern.9 These results were twofold. First, the government was successful in having the announced increase rescinded. Second, the stockpile reduction program was established. The program that was established called for an orderly reduction of the stockpile to a level of 450,000 tons by 1981. This reduction was based on minimum and maxi- mum yearly allocations (subject to carry—overs) which had to be withdrawn by each of the participants as follows: 9For a detailed study of the 1965 price crisis in the aluminum industry see Hass, Porat, Tan & Young, op. cit. Maximum allocati IntalcO the sto< a Contr; AlthOug] Chinges entire . redUCti‘ in the : Table l \ See Far 113 Minimum Yearly Participant Allocation Alcan 10,000 tons Alcoa 29,400 " Harvey 2,700 “ Kaiser 20,100 ” Ormet 5,700 ” Reynolds 22,400 Total 90,300 tons Maximum allocations were established at twice the minimum allocations. The program did not include Anaconda, Conalco or Intalco as they were not original participants in building the stockpile; consequently, they elected not to enter into a contract to participate in the withdrawal program. Although not of primary concern to the effects of price changes on the level of shipments, the results of this entire action was the establishment of an orderly stockpile reduction program with its eventual elimination as a factor in the production, inventory, shipment cycle.1 The remaining seven price changes as shown in Table 12 were increases wherein possible effects from the 10For additional details of the stockpile program see Farin, 22: cit., p. 27. price vide parti not t secom prote< from : tice < for a that t Exhibi Proter the se year E direct creasE and st of the delive tion, 114 price protection policy might be expected. In order to pro— vide data for evaluating the effect of price changes, all participants in the industry survey were asked whether or not they did, in fact, provide price protection; and secondly, they were asked the length of time of the price protection. The results of the survey, based on information from six respondents, indicated that they followed the prac— tice of allowing a period of price protection on shipments for a period of approximately thirty days after the date that the price change is announced. (See Appendix B — Exhibit 2). Based on confirmation by the industry that price protection does exist, the following analysis will cover the seven successful price increases effected in the ten year period covered in this study. This analysis will be directed toward a determination of whether or not price in- creases do cause short range fluctuations in deliveries and shipments in the months immediately following the date of the price increases. Theoretically, the fluctuations should be expected to follow a pattern of an increase in the level of deliveries and shipments during the period of price protec— tion. Following this period of increased act1v1ty, 1t would be activity change 1 data exj changes the moni effect < announc( in the actua l OCCUrre 1eVels total, 115 would be reasonable to expect to find a period of depressed activity during which time excess inventories would be used. A problem that exists in analyzing these price change fluctuations is the fact that delivery and shipment data exists only on a calendar month basis, while price changes are announced at times other than the first day of the month, This condition then has a potential varying effect on monthly activity depending on the timing of the announcement within the month. This condition is resolved in the following analysis by three assumptions: 1, If the price change announcement is made in the first days of the month, that same month will be primarily effected by the price change with only a minimal effect in the following month, 2. If the announcement is made in the middle porn tion of the month, both the current month and following month should indicate increased activity. 3. If the announcement is made in the latter part of the month, the following month will be prim marily_effected. Based on the above assumptions, Table 13 indicates actual levels of delivery and shipment activity which occurred when a price increase became effective. These levels are stated in gross tonnage per month to illustrate total volume movements which subsequently result in inventory increases or reductions, The change from the indicated I'll?“ wwmnfilmmmfl. Ammogo MHUHMNAH Mm. QMHHUMHHHRHAV man—”.20: QMHUM—J—mmfi MON HOUZH EVAN—HERA“. rvHO WHZMUAAHHHNW AH: WNHNNHNVHHWQ WWONNU m, .H MHJHM—HVH. Ham Ham we. Hus mass 0.5 + mmo.HNN mass m. I . mass ems m.NMI Hum.QON ems o.NNI wae.mem MW. an: some .Hm am: I l Dwo.mom l l NHH Now . . mmm.mmm no. .uez .nmm o.m + Hmo.mnm .nmm m.m + .Nmm no. .nmm .umo N.H I smo.am~ .omo o m I awn. mm as. .ees . .uwn n.m + an.mou .omn m.H + wwm.n so .omn Roma .NH new I I omo.qu I. I mm.» Nmm . .cmh. .oon e.NHI mmH.~H~ .oon N.NHI amNHNmN MW. .uma .uuo o.na+ aNH.NsN .uoo «.5 + mmq,mww so” .>oz .uuo m.m + N¢~.¢HN .uuo n.N I mswfims so .uuo seas .sH .>oz I I msm.oo~ I I Hem mom . .9; same m.~ I asa.eom sans n.n I HmonomN so. knew he: m.H + moo.HH~ has w.m + muo Ham we. . . . . RN «0. 9.56 a an: m m + emu saw smz m s + moa.~ has «sea q mess I I Nos.wom I I mam new so. .Ha< s.m I www.moa .ua< 0.0 I wHNHHsN es. .mmu m .nam N.oa+ NN¢.¢~N .nmm ~.m + amm.nsm es. .emz 1. .pmm w.” + who.sH~ .pmm «.5 + amm «am so. . m «sea .s .um: I I ooq.ooN I I hen.mmw so. a m .unmm «.5 I mmm.nma .uamm n.s I moo.mq~ ms. .MMM .m:< o.s + Hoo.NON .m:< m.H + wmo.mmN mo_.u . I I wo~.qafi I I has.omm ms. .m=« moms .mN “mum .ewa m.~H+ mHN.~eH .aes s.~ I mmo.mmH co. .nmm .>oz m.~ I mNH.qu .>oz m.H I mmw.sma om. .aas .>oz H.HN+ mme.swfl .>oz N.sN+ mosgmow an. .uwa . I I smo.~mn I I wa.ame mm. .>oz amme on .009 .oz.mmm N .oz.uwm N Sumo: £3“on meow. £2.82 nusoz\ mdom. nudes wmsmnu woemumwmm Scum musmEmflnm woamuowmm Scum 3.39%an wmuommfiw mowum mo oumo munufimfinm sH Hmuoa wwwucfinama ca Hauom. @935 ”:50 Mom wwnmao usmo Hem . womHImmmH .mmo24mo MOHMm em nmeommm¢ mmezoz omevmqmm Mom .HOQZH ZDZHSDJE mo mHzm‘ZmHMw 9,2 mmHmm>HAmn mmomo ma MAE; refereni In each column I month i: be a mo followi does em changes June 4, Patterr fOIlowi in the activit Case, i in the Case t] rather rESpec not fo °°Curr reference month is also included as a measure of magnitude. In each case, the first month shown in the ”Affected Month" column opposite the ”Date of Price Change” is the reference month in each series of months. This month is assumed to be a month of normal activity to which changes in the following months can be compared. In viewing each price change individually a pattern does emerge in the selected changes. In three of the price changes, those of September 23, 1963, March 4, 1964, and June 4, 1964, deliveries and shipments follow the predicted pattern. In each of the three cases, the first two months following the reference month show a higher activity than in the reference month while in the third succeeding month activity drops to a level substantially lower. In a fourth case, that of November 16, 1964, a single variation occurred in the pattern of total deliveries in November. In this case the deliveries were lower than the reference month rather than higher, as would be expected. In all other reSpects this price change also followed the pattern. The remaining three price changes in the series did not follow the prescribed pattern. Reviewing this lack of correlation in the light of extenuating circumstances occurring at the same time, it is assumed that this deviath 1959, a1 of the j The lad of May down in Indicat 0f deli Second} each of ments, tWeen t of char Correle Correlg fifteel deliVe] the Ca: that w: Sidere, situat 118 deviation from the pattern concerning the December 16, 1959, and January 12, 1967, price changes was the result of the year end seasonal activity previously discussed. The lack of correlation in the remaining price change, that of May 31, 1968, was the obvious result of the strike shut- down in progress in the aluminum industry at the time. The overall pattern is summarized in Table 14. Indicated in the table is the expected direction of change of deliveries and shipments in each of the affected months. Secondly, the actual direction of change is indicated for each of the affected months for both deliveries and ship— ments. In the last section of the table, comparison be— tween the expected direction of change and actual direction of change is indicated by a positive sign (+) to indicate correlation and a negative sign (_) to indicate non--= correlation. The total correlation in the seven price changes is fifteen of twenty months or 75 per cent in the case of deliveries and fourteen of twenty months or 70 per cent in the case of shipments. When only the four price changes that were unaffected by extenuating circumstances are con» sidered, almost complete correlation is evident. In this situation only one month of a total of twentwaour monthly w®®HIOMQH Ammugu MUHMHAH Mia QWHUWNNH’V WEZOE QMFHUMHQWW “OHM HOUZH EZHEJHV ”HO WHZMfi—‘AmHmW QZEV WWHMNNKVHHm—Q 2H WNOEU iDHUdV 9.261 QMFHUMBNW rvNO ZOHHVNEOU aw H. muHQAVH 119 H H H H + no. 0 I um. .um: I. .I + I I H... I + no. .nmm + + + + + N0. nah: I no. .Gmh. + + I I .009 + + + + + 3. . + I. + I + #0. >02 I I <0. .w3< + + I + + + + + q? 33. + + + + + so. mash. + + I I I so. as: + + + + + «o. 3.34 + + + + + we. :32 + + I I I 8. .52 + + + + + mo. .30 + + + + + no. ummm I + + I I cs. .nmm I I I I + co. .ama + + + + + mm. Jan muama Ham mmHHm>meQ muses Ham mmflum>flamn sane: mnuaoz sumo: mooa>mum vmuomwwm wwuuwmw< HOHUNHQHHOU HHOHUUOIHIHQ HGSUU< HGNVO IGD HQ>O owsmnu mo wwsmno mo coauumufim coauumufin emuuwmxm wmuomnxm we. Has use as. am: moms .Hm an: we. .uon “was .NH .ama so. .uoo coma .oa .>oz so. am: «sea .q mass as. .nmm «was .e .um: no. .w:< moms .mm .uamm mm. .>oz mama .oH .uma guaoz m amno muwum wouommmmab mo some wmaalmmafl “mmozquo ZH mmwz2 \fiN—EHflnfl mo Mahmomun“ a Hausa m EHN 141 “unwise; magnum;- 08.9: 088 m m. w ”u 98me :u .. W m .u. v a; q n m '— O u l d O 1 m a n. momalmmmH .BOUZH EH52 NMSw—m mo ENGAGE Qua WBMOAEH m NEHM k! ‘Bllll‘l’ the t 0: th net 0 noted Febru Unite are a of th level time. in 19 tinue a per 142 the top on an ascending scale and total exports are plotted on the bottom portion of an inverted scale. The resulting net of imports and exports are also plotted. As can be noted, except for the period from November, 1959, to February, 1961, and the single month of January, 1962, the United States has been a net importer of primary aluminum. A review of exports shows that, although fluctuations do occur, no recognized patterns of short range fluctuations are apparent or consistent. Over the entire ten year period of the study, only two extended periods occurred where the level of exports increased over an appreciable length of time. One of these periods was during the business decline in l960~6l. The other started in the fall of 1966 and con— tinued until July, 1967. This likewise was partially during a period of reduced business activity. Gross imports and net of imports over exports dis— played a series of six peak periods. The peaks of 1959, 1962. 1963, 1965, and 1968 coincide with the labor con- tract termination dates of the domestic aluminum industry. These peaks indicate that a portion of the metal that is inventoried as a strike hedge is supplied by foreign producers. No attempt has been made in this study to relate end pr specif hedge, is sul affeci by an on le ing t estim numbe tions losse hedgf A1 tht prov suff inte We not for War 143 end product demand with total metal supply to determine the specific amount of additional metal imported as a strike hedge, although it is apparent from Figure 9 that the amount is substantial. It is also apparent that these imports affect domestic production by reducing domestic shipments by an equivalent amount. As a rough approximation, based on levels of net imports immediately preceding and follow" ing the strike hedge period, these additional imports are estimated to be as indicated in Table 18. The approximate number of days of production lost to the estimated addi— tional imports serve as an indication of the amount of losses incurred by domestic producers and labor because of hedging against the threat of an interruption of supply. Although admittedly only rough approximations, these figures provide evidence that both domestic industry and labor do suffer economic losses because of the threat of supply interruptions brought about through collective bargaining. War Threat Inventory gpggg The peak of net imports which occurred in 1966 does not relate to any labor contract negotiations. The reason for this high level of imports is attributed to the threat of a supply interruption or shortage due to the Vietnam War. In this case, users were faced with increased demands E5 Year 1959 1962 1963 1965 l96E for duc res 144 TABLE 18 ESTIMATED ADDITIONAL PRIMARY ALUMINUM IMPORTS OCCURRING DURING LABOR CONTRACT NEGOTIATIONS Estimated Approximate Days Year Additional Tonnage of Domestic of Net Imports Production Lost 1959 50,000 9 1962 45,000 8 1963 42,000 7 1965 52,000 7 1968 109,000 11 for end products thereby necessitating increased purchases to fill work in process pipelines. Because domestic pro— ducers were operating close to full capacity levels, users resorted to foreign sources to fill this need. Summary Results of this analysis indicate no reason for rejecting the original hypothesis regarding the aluminum ingot Production-Inventory—Shipment Model. The diverse characteristics of a widely fluctuating shipment pattern and a relatively stable production pattern establish the condition wherein the uncoupling characteristic of inventories caus clos actj actx dirt als inc Usi 10s tot mat one of 145 is required. Although other factors exist, the primary causes of fluctuations in both shipments and production are closely related to labor contract negotiations either in activity brought about in anticipation of a strike or in actual shutdown resulting from strikes. In addition to the fluctuations that are caused directly by labor contract negotiations, detrimental effects also occur to both domestic industry and labor because of increased imports. This effect can be approximated for 1968. Using the eajmated increase in imports of 109,000 tons, and an estimated labor content of $60.001 per ton, this is a loss in direct labor only of approximately $6,500,000. The total effect on domestic business is a reduction of approxi- mately $56,680,000.2 Further, although insufficient evidence from only one incident precludes arriving at a conclusion, the threat of war also appears to be a condition which generates inventory and import fluctuations in the domestic ingot market. 1See Table 4 for cost and price data. 2Ibid. [9 It." _.__, _’ v—"I—v" v CHAPTER VIII SUMMARY AND CONCLUSIONS This study of the aluminum ingot market, as de— picted in Figure 2, was undertaken to examine fluctuations in this market in the United States during the period 1959- 1968. Specific causes of the fluctuations were identified and the extent to which they effected purchasing, inven- tories, and shipments were analyzed. Conclusions The study was approached by analyzing monthly total deliveries, shipments, production, and inventory data that were applicable to the flow of aluminum ingot as shown in Figure 2. This analysis identified and evaluated conditions which effected the domestic ingot market during the period 1959—1968. The results of the analysis, as applicable to the hypotheses and questions, are discussed below. Hypothesis_; The first hypothesis stated: During the period 1959—1968, causes of fluctuations in aluminum ingot inventories and shipments were the result of other than changes in the level of demand for ingot. 147 The validity of this hypothesis (demonstrated in Chapter VI "Aluminum Ingot Deliveries and Shipments, 1959— 1968") was in the form of a time series analysis of aluminum ingot total deliveries and shipments during the period 1959— 1968. The time series analysis led to the identification of conditions which caused fluctuations in deliveries and ship- ments. The specific conditions that were identified were: 1. Year end institutional factors of inventory taxes and attempts to show improved sales records, which cause ingot producers to in- crease shipment activity in December of each year. 2. Threats of interruptions in the supply of ingot resulting from labor contract terminations. 3. Threats of interruptions in the supply of ingot resulting from wars and threats of wars. 4. Price increases. The effect of these conditions on the aluminum ingot market is fluctuations in that market (see Figure 4). These fluctuations and their causes led to the formulation of conclusions as follows. Conclusion I — Specific conditions in the aluminum ingot market (as enumerated abovel cause extensive short range fluctuations in the levels of deliveries and shipments of aluminum ingot. This conclusion is based on a trend analysis (Chapter VI) which clearly demonstrated the existence of fluctuations in total deliveries and shipments. Ident the r three tract specj atior Speci the 1 cans 0f 01 This and in t in t POSS 148 Identification of the causes of the fluctuations as being the result of institutional factors, price changes, and threats of supply interruptions resulting from labor con— tract terminations and wars was accomplished by associating specific historical events in Appendix A with the fluctu- ations. This association led to the identification of the specified conditions as having the most likely relation to the resultant fluctuations.l Identification of the market fluctuations and their causes raised a question as to the degree of predictability of occurrence of a fluctuation following a specific cause. This element of uncertainty is the basis of Conclusion II and Conclusion III. Conclusion II - The corditions causing short range fluctuations in the level of aluminum ingot deliveries and shipments are predictable, under various degrees of certainty. The predictability of the Occurrence of conditions in the aluminum ingot market exists under varying degrees l -. . . Establishment of the EXistence if fluctuations in the aluminum ingot market raises two queezions for possible future consideration: a) To what extent do the fluctuations in the aluminum ingot market effect over-all economic activity? b) What relations, if any, exist between these fluctuations in the aluminum ingot market and similar conditions which might exist in other commodity markets? of ti] fit 00‘ 149 of certainty. This certainty relates to three factors: timing, duration, and magnitude. Of the conditions identi- fied, labor contract terminations and the year end seasonal condition can be accurately predicated as to timing. The predictability of the timing of price changes and the actual outbreak of wars is more uncertain. The effect of price changes and year end seasonal conditions can be accurately predicated as to duration. The duration of the effect caused by wars and strikes are subject to a substantial degree of uncertainty. Predictability, relative to magnitude, is in all cases, subject to moderate degrees of uncertainty. No attempt was made in this study to establish quantitative relations between the conditions and the magnitude of the resultant fluctuation. Consequently, magnitudes of the fluctuations have not been established explicitly. Conclusion III — Aluminum ingot purchasers react to the uncertainty of conditionsiby overbuying material to hedge against threatened supply interruptions. Discussions with members of the aluminum industry led to confirmation of this conclusion. The varying degrees of uncertainty pertaining to contract terminations, year end seasonal conditions, price changes, and prewar inventory buildups establish situations, wherein an aluminum ingot purchaser develops expectations as to the effect of these 150 conditions on the future availability of material. The degree to which a purchaser reacts is indicated by the volume of overbuying that occurs. Supporting evidence (Chapter VI) and survey results (Appendix B) indicate that in reacting to a condition effecting the supply of a material, the purchaser is per— forming a hedging actiOn against a threatened supply inter- ruption or price increase. This hedge is an attempt to assure material to maintain a continuity of production in the purchasers' plant. This hedging action is the less costly of two alternatives that confront the purchaser. These alternatives are: one, the increase in costs asso— ciated with increased inventories; or two, losses associ- ated with a shutdown of production facilities for lack of raw materials. The less expensive of these alternatives is the increased inventory levels. The only practical 2A possible measure of the extent to which a pur- chaser of aluminum ingot reacts to uncertainty might be a seasonally adjusted index, indicating the change in the level of new orders that are received by the aluminum ingot producers. At the time of this study, this information was not generally available from the aluminum industry. In addition, when more than one reason for hedging occurs at one time, the question arises; do buyers compound their overbuys and thereby cause greater fluctuations, or is the degree of hedging determined by the event which is expected to be of the greatest significance? 151 alternative this leaves for the purchaser is to build a hedge inventory. Conclusion IV — The 39st extensive fluctuations in the level of deliveries and shipments of aluminum ingot are those resulting from industry labor contract terminations. Based on a combination of the observed number of occurrences, the magnitude of the fluctuations, and the duration of the fluctuations, the effect of labor contract terminations appear to be more extensive than any of the other identificable causes of fluctuations. (The extent of fluctuations caused by labor contract terminations is approxi- mated in Table 11. Hypothesis II The second hypothesis stated: The aluminum irgot producers follow policies which » lead to inverse stock—Sales ratios of aluminum ingot at the producing firms. The validity of this hypothesis is based on evi- dence which showed that ingot deliveries and shipments fluc- tuated over a wide range (Chapter VI}. At the same time, the aluminum ingot producers tended to maintain a stable level of production (Chapter VII). The consequence of a fluctuating level of deliveries and shipments, combined with a stable level of production, is fluctuating inventories. These fluctuations in inventories absorb the differences in 152 rates between slipments and production. The net result is that, as long as the producers do not change the level of production, inventories decrease as shipments increase and they increase as shipments decrease. This relation between deliveries and shipments, production, and inventories leads to inverse stookwsales ratios during at least part of the inventory cycle. Conclusion V w Aluminum.ingot inventories tend to follow an inverse stock—sales ratio. This inverse ratio is substantiated by the intention of the aluminum ingot producers to use inventories as an un- coupling device between production and shipments. These results largely invalidate assumptions that aluminum ingot prOducers intend to Operate with a carstant stockwsales ratio. Analysis of Questions In addition to the two hypotheses that were dis- cussed in the preceding sections, three questions were raised in Chapter I. The results of the attempt to answer these questions, are discussed below. Question I — Do significant levels of correlation exist between the rate of shipments of aluminum ingot and the rate of consumption in autgmgpilg production? This question was approached in the form of a 153 correlation analysis. This analysis was performed using accepted procedures wherein correlations of coefficient and coefficients of determination were calculated between both aluminum ingot deliveries and shipments, and automobile pro— duction. These calculations, covering the period 1959—1968, were performed on a current basis, a 30 day lag basis, and a 60 day lag basis. The coefficients of determination ranged from a high of 30.7 per cent to a low of 2.4 per cent. In no cases did the coefficients show a high degree of cor— relation. Because the analysis failed to develop a signifi— cant level of correlation, the data have been excluded from the study. Question 2 - Are impgrts or exports of aluminum ingot major factors in the domestic aluminum market? This analysis illustrated that a relation existed between threats of supply interruptions brought on by labor contract terminations and wars and the level of imports (see Figure 9). These relations led to the formulation of the following conclusions. Conclusion VI - A form of hedging used by aluminum ingot purchasers is to increase the level of im- ports of aluminum ingot during periods of threatemgg supply interruptions. Aluminum ingot is a homogeneous product with a high degree of cross elasticity between producers. This high l54 degree of cross elasticity provides easy substitution of foreign material in the domestic market, which provides an additional source of supply during threatered interruptions of supply of domestic material. This leads to two separate reactions by the domestic purchaser. First, the purchaser obtains some of his prewcontract termination hedge inventory by purchasing from foreign sources prior to the threatened interruption (see Figure 9). This study indicates (Table 18) that a substantial amount of inventory hedge does come from these foreign sources. Second, the purchaser can also obtain material from foreign producers to sustain production during an actual supply interruption; if domestic inventories are insufficient. Concl“"ion VII ~ Labor contract negotiations have _L‘ulb’ an adverse economic effect on both domestic aluminum ingot producers and the labor employed by domestic producers. In the collec:ive bargaining process, direct economic 1 losses can be identified and the amount of that loss can be approximated if a strike occurs and production ceases. In addition, there is a further loss to both the producer and to labor, regardless of whether or not a strike occurs. This loss results from the pre—contract termination inven— tory hedge that is supplied by foreign producers. This t... ,' ..‘q I ' material, once it becomes a part of the purchaser s inventory, 155 will ultimately lead to underbuying of domestic metal after agreements are reached and labor contracts are settled.3 Question 3 — What information is available con— cerning lead times and backlogs in the aluminum industry? A search of current literature failed to provide any usable information relating to aluminum delivery lead time and backlogs. The producers were questioned concerning the availability of information in this area. The results of the questionnaire (see Appendix B — Exhibit 2) substanti— ate previous assumptions that leadtime and backlog infor- mation is not available to the general public. 3This study establishes an approximation of the Volume of aluminum ingot that is imported as a pre-contract termination inventory hedge. This approx1mation is reported in Table 18. It is suggested that in the future a more ex— tensive analysis might be undertaken to establish more accurate data. SELECTED BIBLIOGRAPHY Books Abramovitz, Moses. Inventories and Business Cycles. New York: National Bureau of Economic Research, Inc., 1950. Aljian, George W. (ed.) Purchasing Handbook. New York: McGraw-Hill Book Company, Inc., 1966. Barber, Clarence L. Inventories and the Business Cycle with Special Reference to Canada. Toronto: The University of Toronto Press, 1958. Brubaker, Sterling. Trends in the World Aluminum Industry. Baltimore: The.John HOpkins Press, 1967. Carr, Charles C. ALCOA an American Enterprise. New York: Rinehart and Company, Inc., 1952. Croxton, Frederick E. and Cowden, Dudley J. Applied General Statistics. 2d ed. Englewood Cliffs: Prentice~Hall, Inc., 1955. Engle, Nathaniel Howard, et al. Aluminum, An Industrial . Marketing Appraisal. Homewood: Richard D. Irwin A Inc., 1945. Eggert, Robert J., et al. Inventory Fluctuatiogs, Price Level Chapges, and ECOnomic Growth. Washington: Prepared for the Joint Economic Committee. U. S. Government Printing Office, 1962. Farin, Philip and Reibsamen, Gary G. Aluminum: Profile of an Industry. New York: Metals Week, 1969. Griffin, John Ignatius. Statistics: Methods and Applica- tions. New York: Holt, Rinehart and Winston, 1962. Hart, Albert Gailord. Money,Debt and Economic Activity. New York: Prentice-Hall, Inc., 1948. 156 157 Keynes, John Maynard. The General Theory of Employment. Interest and Money. New York: Harcourt, Brace and Co., 1936. Mack, Ruth (Prince). Information, Expectations, and Inventory Fluctuations. New York: National Bureau of Economic Research, Inc., 1967. Muller, Charlotte F. Light Metals Monopoly. New York: Columbia University Press, 1946. Peck,Merton J. Competition in the Aluminum Industry, l945el958. Cambridge: Harvard University Press, 1961. Plossl, G. W. and Wight, O. W. Production and Inventory Control; Principles and Techniques. Englewood Cliffs: Prentice-Hall, Inc., 1967. Robinson, Patrick J. and Paris, Charles W. Industrial Buying and Creative Marketing. Boston: Allyn and Bacon, Inc., 1967. Stanback, Thomas M. Jr. Inventory Fluctuations and Economic Stabilization, Part 1. Prepared for the Joint Economic Committee, Washington: U. S. Government Printing Office, 1961. Stein, Harold.(ed.) Public Administration and Policy Development, A Case Book. New York: Harcourt, Brace and Co., 1952. Timms, Howard L. The Production Function in Business. Homewood: Richard D. Irwin, Inc., 1966. Wallace, Donald H. Market Control in the Aluminum Industry. Cambridge; Harvard University Press, 1937. Westing, J. H. and Fine, I. V. Industrial Purchasing. 2d ed. New Yurkg John Wiley & Sons, Inc., 1961. . Britannica-Book of the Year. Chicago: EncyclOpedia Britannica, Inc., Yearly 1959 through 1968 inclusive. 158 Metal Statistics. Somerset: American Metal Market Co., Yearly 1959 through 1968 inclusive. . Minerals Yearbook. Washington: U. S. Govern- ment Printing Office, Yearly 1959 through 1968 inclusive. . Yearbook of the American Bureau of Metal Statistics, York: The Maple Press Co., 1966 and 1967. Reports and Documents 1968 Aluminum Statistical Review. New York: The Aluminum Association, 1969. 1967 Aluminum Statistical Review. New York: The Aluminum Association, 1968. Haas, John A. et al. The Aluminum Price Crisis of November 1965: Its Effect on Business—Government Relations. Pittsburgh: University of Pittsburgh (An unpublished Report). Annual Report—1967. Oakland: Kaiser Industries Corp., 1967. Annual Report—1960. Oakland: Kaiser Aluminum and chemical Corp., 1960. Boyes, Rodney L. Fluctuations in Steel Purchases and Inventories, 1953—1963. Lansing: Michigan State University, 1964 (Unpublished Dissertation). > U. S. Congress, Joint Hearings Aluminum Plant Disposal. Washington: U. S. Government Printing Office, 1945. . U. S. Dept. of the Interior, Bureau of Mines. Mineral f Industry Surveys, Aluminum Mouthly. Washington: U. S. Government Printing Office, Monthly January 1959 through December 1968 inclusive. 159 U. S. Dept. of Labor, Bureau of Labor Statistics. Wage Chronology-Aluminum Company of America,l939—67, Bulletin #1559. Washington: U° S. Government Printing Office, 1967. The Story of Aluminum. New York: The Aluminum Association, Undated. U. S. Congress, Aluminum Industry Hearings before Sub- committee #3, Select Committee on Small Business. Washington: U. S. Government Printing Office, 1956. Other Sources Hoagland, John H. ”Monthly Change Indices and Other New Measures of Business Fluctuations." Paper read before the Business and Economic Statistical Section of the American Statistical Association, Washington D. C., December 29, 1959. . ”Purchasing and Inventory Forecasting.” Paper read before the Business and Economic Statistical Section of the American Statistical Association, Stanford University, August, 1960. S E C I D NJ E P m APPENDIX A CHRONOLOGY OF SIGNIFICANT HISTORICAL EVENTS 1959—1968 The events listed in this chronology were selected for inclusion based on their apparent relevance to aluminum ingot market conditions. The general historical series of events was derived from Encyclopaedia Britannica Yearbook. This general series was supplemented with Specific events by information published in the Wall Street Journal, The American Metal Market,and other selected sources. 1959 Jan. 1 Castro makes power move in Cuba. Apr. — Steel and union prOpose one year wage and price freezes. May 1 Anaconda and Aluminum Workers sign contract, balance of industry in negotiations. May 5 USW and Steel start negoriations. May 11 Wildcat strikes occur in steel. June 28 USW and steel agree to 2 week truce. June — Aluminum produCtion and shipments at record levels in anticipation of August strike. July 13 Steel mills start shutting down as negotiations collapse. July 28 Aluminum negotiators agree to extend current con— tracts to Nov. 1 or 30 days after steel settles. JUly — Aluminum production and shipments continue at record levels. 160 (Continued) l6 19 31 29 June 26 11 Aluminum production and shipments drop extensively. Mitchell threatens steel with Taft—Hartley. Auto industry feels steel shortage. GM begins layoffs. Kaiser signs steel agreement. Aluminum industry extends contract indefinitely. Steel strike ends after 116 days after Supreme Court upholds Taft—Hartley. Alcan announces aluminum price increase. Aluminum industry reaches a three year contract agreement. Steel industry discontinues negotiations. Secondary aluminum stocks high because of lower auto production. Steel industry agrees to settlement. Kennedy announces candidacy for president. Auto inventories high, work week reduced. Alcoa and Reynolds open new reduction lines. Stock market hits 17 month low. Khruschev reveals U—2 plane incident. Yates committee recommends Justice Department probe aluminum pricing. Early auto shutdown predicted. Economy appears weak. 1960 (Continued) Aug. 12 Ike indicates that economy is in good shape. Sept. 22 Ike and Khruschev meet in New York. Nov. 7 Dec. 4 Dec. - Jan. 20 Feb. 16 Feb. 21 Mar. 17 Apr. 6 Apr. 10 Apr. 17 May 1 June 29 July 28 Aug. 1 Aug. 31 Kennedy elected. Auto market weak. Apparent consumption of aluminum in 1960 down 19%. U. S. ends year as net exporter of aluminum. U. S.—Cuba break relations. Economists indicate recession will worsen. Kennedy inaugurated. Kennedy appoints committee to promote wage and price policies. Kennedy announces new anti—recession plans. Peace Corp established. FRB says downturn is halted. Auto sales pick up. Steel and aluminum demand increases. Personal income increases — "Bay of Pigs”. Economic activity increasing. Auto industry negotiations start. Kennedy's military buildup program approved. Congress approves call up of reserves. Russia resumes ”A“ tests. 1961 (Continued) Aug. 31 Sept. 6 Sept. 12 Sept. 21 Oct. 31 Nov. 20 Nov. 24 Feb. 26 Mar. 2 Mar. 14 Mar. 28 Apr. 11 Apr. 13 May 15 June 1 June 4 June 29 July 8 Aluminum workers wage increase goes into effect. U. S. resumes "A" tests. GM local strikes spread. GM-UAW reach agreement. Alcan reduces aluminum price. Russia explodes super bomb. Economic statistics look good. Auto production up. Chrysler lays off some workers. Aluminum production and shipments show upturn. Steel hedge buying light due to Optimism for early settlement. Steel negotiations broken off. Steel negotiations resume. Steel settlement reached. Kennedy denounces steel industry for attempted price increases. Steel industry rescinds price increases. Aluminum industry Opens contract negotiations. Aluminum and AWU suspend negotiations. Widespread layoffs in Steel industry. Aluminum and USA agree on a 2 year contract. Aluminum and AWU resume talks. .11.)...“ ...... ‘im.w;‘r a! 1962 Continued) July 31 AWU strikes aluminum industry. Aug. 2 Aug. 27 Sept. 4 Jan. 11 Jan. 21 Jan. 24 Feb. 6 Mar. 6 Apr. 4 Apr. 30 Apr. — May — June 20 June 26 June - July 1 July 31 Aluminum and AWU settle. Kennedy confirms USSR is providing Cuba with supplies and technicians. Kennedy warns USSR. Cuban blockade begins. Kaiser initiates aluminum price decrease. Auto production reported higher. Steel hedge buying reported. USSR build up reported in Cuba. January auto sales reported up. February auto sales reported up. Nationwide rail strike averted. Steel production up. Aluminum and unions continue informal talks. USW fails to serve notice to reopen contracts. Steel — USW settle contract. Auto sales at record pace. Aluminum and unions fail to exercise reOpener clause. Business continues to expand. Aluminum and unions agree to extend 1962 contract to June 1, 1965. ,4*_4.l_.g.. l_4‘ fang”.-. ._ . 1963 (Continued) Aug. 2 Sept. 4 Sept. 6 Sept. 18 Sept. 23 Dec. 27 126.4 Jan. 3 Jan. 9 Jan. 16 Mar. 4 Mar. 26 Apr. 7 Apr. 8 Apr. 9 Apr. 22 June 4 Auto sales up. Auto production up. Turmoil in South Viet Nam. Economy continues strong. Reynolds announces aluminum price increase. Selected price increases made in steel — economy continues strong. Overthrow in South Viet Nam. Kennedy assassinated. Kaiser increases aluminum prices, Alcoa aborts increase by failing to follow increase. Auto sales continue to increase. USSR purchases wheat from U. S. Riots against U. S. breakout in Panama. Reynolds increases aluminum prices, Alcoa again aborts increase. Alcoa increases aluminum prices. McNamara increases aid to South Viet Nam. U. S. indicts 8 steel firms for price fixing. Unions strike railroads. Johnson obtains 15 day postponement of rail strike. Rail strike settled. Ormet initiates aluminum price increase. 1964 (Continued) July 7 July 15 Aug. 5 Aug. 24 Sept . 9 Sept. 25 Oct. 16 Oct. 25 Nov. 3 Nov. 16 China shoots down U—2. Republicans select Goldwater. U. S. bombs North Viet Nam. Democrats select Johnson. Chrysler and UAW sign agreement. UAW strikes GM. Communist China explodes "A" Bomb. GM and UAW Sign agreement. Johnson reelected president. Alcoa initiates aluminum price increase. Nov. 19—25 Financial crisis in England. Dec. 11 L95»; Jan. 26 Feb. 7 Mar. 25 Apr. 26 Apr. 30 Apr. 30 Apr. — May 31 U. S. increases aid to South Viet Nam. Military ousts South Viet Nam government. Railroads and non—operating Unions reach agreement. Civil rights rally in Montgomery, Ala. Steel and USW agree to postpone strike deadline to Sept. 1. Britian announces nationalization plan for steel industry. Abel defeats McDonald for presidency of USW. Aluminum and Unions in negotiations ahead of steel. Aluminum and USA reach agreement. 1965 (Continued) June 1 June 1 June 5 July 8 July 20 Aug. 29 Aug. 30 Aug. 31 Sept. 3 Sept. 9 Oct. 29 Aluminum and USA reach agreement. FRB warns of conditions similar to 1929, stock market drops sharply. U. S. forces engage in combat in South Viet Nam. USSR increases defense spending. Military situation in South Viet Nam deteriorates. 75 day Maritime strike settled. Steel and USW fail to reach agreement. Johnson announces 8 day postponement of steel strike. Steel and USW reach agreement. deGaulle announces France's withdrawal from NATO. Ormet initiates aluminum price increase. U. S. releases 200,000 ton from aluminum stockpile, denounces price increase as inflationary. Eastern U. S. and Canada blacked out by power failure. Aluminum companies rescind price increase. U. S. releases 200,000 tons from c0pper stockpile. Aluminum stockpile disposal program established. Peace efforts for Viet Nam continue. Steel companies compromise on price increase. Johnson and Ky meet in Honolulu. 168 lgéé (Continued) Feb. 16 Declining trend sets in in stock market. Mar. 12 Violent anticommunist demonstrations in Indonesia. Apr. 3 Four day railroad strike ended by court order. Apr. 27 ICC authorizes NYC—PRR merger. May 16 Britain seaman strike begins. May - Aluminum demand heavy. June 13 Eight nations renew loan to Britain. June 20 DeGaulle visits USSR. June 29 Britain seaman strike ends. June — Aluminum demand continues strong. July 1 France withdraws from NATO. July 8 IAM strike grounds major U. S. airlines. July 20 England takes deflationary measures. July 25 Stock market drOps 16 points. July m Rioting in Chicago and Omaha. Aug. 4 White House denounces steel price increase. Aug. 16 U. S. banks increase discount rate to 6%. Aug. 19 IAM strike settled. Sept. 9 Auto safety legislation approved. Sept. 22 u. S. offers to halt bombing of North Viet Nam. Nov. 8 Republicans score major gains. Jan. Jan. Feb. Mar. Apr. Apr. May 2 May 2 June June June July July Aug. Sept. Sept. 12 26 9 6 12 3 5 7 23 15 18 3 l 6 169 Ormet initiates aluminum price increase. Johnson predicts slower expansion, calls for wage and price restraint. Wildcat strike at GM idles 174,000. Johnson asks for restoration of investment tax credit. FRB lowers discount rate to 4%. Commerce Department announces lack of growth of GNP. Johnson signs bill banning rail strike until June 19. 6th fleet ordered to Eastern Mediterranean. ArabaIsraeli war breaks out. Israel proclaims Victory, cease fire agreement reached. Johnson and Kosygin meet in New Jersey. Copper miners strike. Johnson orders end to 2 day rail strike. Johnson requests 10% surtax. Steel raises prices. UAW strikes Ford. North Viet Nam rejects peace proposals. Ford—UAW reach agreement. Aluminum shipments down, inventories rising. Britain devalues pound. Nov. Dec. Dec. Mar. Mar. Mar. Mar. Mar. Apr. Apr. Apr . (Continued) l9 6 22 25 29 ll 29 FRB increases discount rate. Johnson appeals for wagewprice restraint. FRB index shows sharp increase. Aluminum shipments continue weak. Pueblo seized by North Korea. Johnson orders some reserves to active duty. TET offense mounted by Viet Cong. Johnson calls for wage—price restraint. U. S. rushes more troops to South Viet Nam. Steel hedge buying begins. Auto production cut, COpper negotiators called to Washington. 10—15 Gold crisis develops, tentative agreement reached 14 28 28 31 l 2 4 by copper industry. FRB raises discount rate to 5%. Steel stockpiling underway, aluminum shipments up sharply. USW forms bargaining strategy. Johnson announces he will not seek another term. London gold market reopens. U. S. Halts North Viet Nam air attacks. King assassinated. 1968 (Continued) Apr. 11 Apr. 18 Apr. 18 May 10 May 31 May June 1 June 5 July 30 July 31 Aug. 7 Aug. 8 Aug. 15 Aug. 20 Aug. 28 Aug. Sept. 10 Sept. Sept. Oct. 15 Nov. 5 Aluminum bargaining underway. Aluminum and steel stockpiles reaching peaks. FRB raises discount rate to 5%%. Peace talks begin in Paris. Alcoa initiates aluminum price increase. Aluminum shipments continue strong, no agreement reached. Some aluminum plants shutdown by strike. Robert Kennedy shot. Steel-USW agree to 3 year contract. Johnson assails steel for price increase. Compromise reached on steel price increases. Nixon—Agnew named. FRB reduces discount rate to 5%%. Czechoslavakia invaded. Humphrey—Muskie nominated. Aluminum shipments down sharply, strike continues. Czech~USSR sign agreement. Steel orders and shipments at low level. Aluminum on upswing as plants resume productiOn. UAW walks out at 5 GM plants. Nixon elected president. NOV . Dec. Dec. Dec. Dec . 172 (Continued) 20 French franc weak. 4 Wave of speculation in EurOpean foreign exchange markets. 17 FRB raises discount rate to 5%%. 22 Pueblo crewmen released. Aluminum and steel markets improving. APPENDIX B—EXhibit 1 Guide for use in Direct Industry Interviews, Questionnaires, l. 10. ll. 12. and Telephone Follow-ups of Interviewees. Can aluminum ingot, as produced by domestic primary producers, foreign primary producers,and domestic secondary producers, be considered a homogeneous product? Is it a common industry practice to operate reduction plants at a constant level of output? What stage of the over—all aluminum production process do you consider to be the controlling stage? What type of aluminum reduction line (prebake or Soderburg) is less costly to shut down? What factors influence your decision to change levels of production at reduction plants? Do aluminum ingot producers attempt to maintain a constant stockwsales ratio? Is it a normal policy to speculate on inventories at the reduction stage during periods of excess supply? Does it appear that aluminum ingot purchasers hedge against threatened supply interruptions? Is aluminum ingot pricing based on a policy of main— taining a relatively stable price structure? A. Do you allow a period of price protection after announcing a price increase? B. ‘What is the length of time that you provide price protection? Is the over—all demand for aluminum responsive to price changes in the short run? What is the explanation of the increase in aluminum in- got deliveries and shipments in December of each year? 173 l3. 14. 15. 174 APPENDIX B—Exhibit l——Continued What order backlog information do you have avail— able? Is this information available to the general public? What specific delivery leadtime information do you have available? Is this information available to the general public? Does fabricating capacity, in total, exceed reduc— tion capacity? If so, to what extent? Is accurate information available as to the actual amount of aggregate fabricating capacity? APPENDIX B-EXhibit 2 Aggregate Responses to Direct Industry Interviews, Question— 1. naimfi and Telephone Followeupsci Interviewers. Can aluminum ingot as produced by domestic primary pro_ ducers, foreign primary producers,and domestic secondary producers be considered a homogeneous product? Responses: 5 - Yes 2 - Not applicable 1 - No response Is it a common industry practice to Operate reduction plants at a constant level of output? Responses: 7 - Yes 1 — No response What stage of the cwer—all aluminum production process do you consider to be the controlling stage? Responses: 5 — Reduction stage 2 — Not applicable 1 — No response What type of aluminum reduction line (prebake or Soderburg) is less costly to shut down? Responses: 7 — Prebake Reduction Line 1 — No response What factors influence your decision to change levels of production at reduction plants? Responses: Level of Inventory Forecast of Demand Cost and Availability of Funds Do aluminum ingot producers attempt to maintain a constant stock-sales ratio? Responses: 7 — No l — No response 175 10. ll. 176 APPENDIX B—Exhibit 2-—Continued Is it a normal policy to speculate on inventories at the reduction stage during periods of excess supply? Responses: 5 ~ Yes subject to conditions cited in question 5 2 Not applicable 1 — No reSponse Does it appear that aluminum ingot purchasers hedge against threatened supply interruptions? 5 ~ Yes 2 n Not applicable 1 _ No response Responses: Is aluminum ingot pricing based on a policy of main- taining a relatively stable price structure? Responses: 5 — Yes 2 — Not applicable 1 — No response A. Do you allow a period of price protection after announcing a price increase? 5 — Yes 2 m Not applicable 1 ~ No response A. Responses: B. What is the length of time that you provide price protection? B. Responses: 5 - 30 days 2 — Not applicable 1 e No response Is the ovaeau_ demand for aluminum responsive to price changes in the short run? Responses: 7 - No l - No response re... we; .- r .....llr_..-..~ 12. 13. 14. 15. APPENDIX B—Exhibit 27~Continued What is the explanation of the increase in aluminum ingot deliveries and shipments in December of each year? Responses: To avoid state inventory taxes To increase shipments for a Specific year What order backlog information do you have avail— able? Responses: As required for planning purposes. Is this information available to the general public? Responses: 7 ~~No l e No response What specific delivery leadtime information do you have available? Responses: As required for planning purposes Is this information available to the general public? Responses: 7 e No 1 ~ No response Does fabricating capacity, in total, exceed reduc— tion capacity? Responses: 5 _ Yes 2 e Not applicable 1 - No response If so, to what extent? 3 — Approximately 1.5 m l 3 _ Not applicable 1 e Unknown 1 w No response Responses: Is accurate information available as to the actual amount of aggregate fabricating capaCity? 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0.052 0.0N2 0.052 0.002 0.m~2 pa: 0.Nn2 0.00 0.002 0.002 0.052 0.002 0.052 0.052 0.0N2 0.m52 0.002 0.n~2 num c.Nm2 0.00 0.002 0.002 0.052 0.002 0.052 0.052 0.m~2 0.n52 0.002 0.022 cam 0002 .nmmz nomouo uwmmosnuh manucoz acumzwammz u0u0025mm: mwxuh mmxwk xnow :wz wcw2va2 .umu .oz mummucceh .02uuauwh .a022w0 02H .u22«>=om:200 .m22mm .ownuumama .uu>=oucm> .o2wvxuox .qumEou .acwmmu: .m222>mcm>m :2va0 .cOU2< acuuauo2 002ouaw Nuwuqn auz 0205:200 ua2om uduAd Dnfifl=~fl¢ 0 2:1sz Sham PRIMARY AND SECONDARY ALUMINUM INGOT PRODUCTION, SHIPMENT,AND INVENTORY DATA APPENDIX D In Short Tons PrimaEX Ingot Data Secondary Ingot Data Produc— Ship— Inventory Produc- Ship- Inventory, th tion ments Month End tion ments Month End 156700 127678 175108 22722 24206 16615 142116 133397 183827 25995 26861 15784 157189 181839 159177 26844 27622 15217 155213 182930 131460 31304 30951 15268 163857 182607 112710 30261 31073 14757 167323 191421 88612 30772 31109 14739 179194 187387 80419 27207 25285 16586 172816 159206 94029 27838 24780 19664 168206 153170 109065 26326 24798 21204 173742 151683 131124 27266 24604 23336 153665 152024 132765 24206 24306 22984 162996 184123 111638 27205 27043 22862 164023 148129 127532 29141 29784 21841 156825 167215 117142 29206 29570 21231 170688 172846 114984 29199 28125 ’22395 168596 144469 139111 24018 22935 22610 175863 166403 148571 22627 21753 23254 171356 149917 170010 22810 21591 24545 177564 143948 203626 18240 18341 23816 172973 164883 211716 24946 22393 25763 162882 148724 225874 20801 20814 25612 167015 144449 248066 21716 21225 25285 161208 152213 257061 19959 20401 24463 165504 163054 259511 19126 19120 24525 188 189 APPENDIX D--Continued Tear Primary Ingot Data Secondary Inggtgpata 1nd Produc- Ship— Inventory, Produc— Ship— Inventory, [onth tion ments Month End tion ments Month End 261 Fan 161427 129566 291372 20639 21830 22115 ‘eb 138560 142540 287392 19031 19212 22062 [ar 152023 161495 277595 21951 21863 21737 0r 144637 155843 266389 21275 20857 23564 [ay 157544 171068 252864 22624 24812 21421 'un 159092 164451 247504 25943 22986 24493 'u1 164732 155379 256857 20852 20862 24328 .ug 167040 164695 259202 25732 25532 24491 lep 159572 163332 255442 23524 25092 22936 |ct 167295 167086 255441 26227 27413 21763 10V 164125 179432 240343 28288 28723 21339 vec 167992 201281 207055 26558 25968 21884 262 'an 170140 178771 198424 29975 30416 21955 'eb 157701 165374 190751 30353 30087 22696 [ar 177425 197440 170736 32061 31527 22991 pr 173659 189866 154529 32021 30228 24730 [ay 184211 200976 137764 33002 32031 26151 'un 179122 184284 132602 32638 31447 26843 'u1 184106 184993 131715 25188 26717 24882 .ug 168086 169016 130785 31573 29787 27032 ‘ep 176185 158702 148268 30121 31659 26010 'Ct 185191 185338 148120 36451 37216 25424 'ov 179679 174947 152852 35401 36723 24681 ’ec 182424 195150 140108 33950 34660 23377 190 APPENDIX D——Continued ear Primary Ingot Data Secondary Ingot Data nd Produc- Ship— Inventory, Produc- Ship— Inventory, onth tions ments Month End tions ments Month End 9_3 an 184158 169867 154399 37964 38218 23340 eb 162977 178356 139020 36004 36660 26485 ar 181590 201056 119554 37401 37384 27055 pr 181329 199223 101660 38998 39734 27296 ay 192868 206333 88195 38000 39371 25840 un 192491 197379 83307 35397 35689 26496 ul 201355 198934 85728 31385 30192 27244 ug 203074 194268 94534 35899 34751 29187 ep 197378 198133 93779 35867 34315 30471 ct 205117 202001 96895 39381 37338 32418 ov 201117 187355 110657 37227 35381 33765 ec 209074 220719 99012 33600 35008 32235 964 an 212008 202986 108034 39246 39263 32423 eb 200189 200400 107823 38203 39171 31255 ar 214221 216079 105965 41273 40569 32431 pr 208301 220922 93344 43125 42994 32748 ay 214630 208462 99512 38157 37694 32642 un 203749 216281 86980 39416 38781 33277 ul 216100 211069 92011 34246 34441 33098 ug 217198 204947 104262 37762 38865 31520 Bp 211314 205659 109917 38184 39020 30687 ct 218422 206945 121394 39805 40909 29583 3v 213993 219242 116145 36892 37361 29114 ac 222845 242129 96861 39491 40526 29079 191 APPENDIX D--Continued If Primary Ingot Data Secondary Ingot Data“ Produc- Ship— Inventory, Produc- Ship— Inventory, th tion ments Month End tion ments Month End 2 222749 212139 107471 41423 43869 25633 203159 212950 97680 40022 42550 23530 230026 246663 81043 43581 48512 18408 226645 231803 75885 43909 44032 17378 236951 249484 63352 43155 43072 17633 227638 211578 79412 44438 41296 20747 235072 231435 83049 38042 33444 24874 234869 236863 81055 40880 34814 30952 218657 228740 70972 39247 38703 32780 237213 231393 76792 39571 39546 33137 236506 238261 75037 40897 39760 34273 244991 255273 64755 41189 38799 37157 6 247311 233790 78276 42953 44945 35141 223518 230008 71786 40666 42973 32784 249005 256019 64772 49758 50230 32295 240726 245213 60285 45958 46449 31783 252291 244902 67674 44322 45358 30790 244966 249564 63076 43977 43263 31534 252830 245925 69981 36145 35904 31794 239818 247859 61940 45096 45283 31607 245905 245645 62200 46954 45800 32761 258375 254810 65765 44644 48135 29245 251004 250008 66761 45339 47955 26629 262142 254056 74847 49932 48825 27757 192 APPENDIX D——Continued k Tear Prima In .. ,—, 1nd iaERiItT——J§L_T_82E_Q§£§_y_____ Secondary Ingot Data Ionth tionc Shlp— Inventory, Produc— Shlp— Inventory, ments Month End tion ments Month End 1L ran 265228 263487 76588 47601 48064 27296 ’eb 243581 251056 69113 45326 47598 25024 Ear 274381 273681 69823 48832 46421 27433 Pr 268446 255123 83146 45167 42448 30124 by 278924 268801 93269 46658 46801 30048 un 270075 253516 109828 44934 45113 30922 ul 276969 244761 142036 42192 40519 32581 .ug 277557 249035 170558 52160 51109 33275 ep 270393 253359 187592 40445 45681 27722 ct 283792 266435 204948 52510 52772 27143 0V 277232 266080 216100 50999 51766 25918 ec 282682 290812 207970 54749 55176 25135 M an 285283 291212 212998 48274 51576 20727 eb 267112 292442 187668 52938 51623 22042 ar 288328 314805 161191 52893 52783 22152 pr 280287 328079 113399 51336 52048 21439 ay 289037 305080 97356 54578 53073 23064 an 218540 206571 109325 47906 45386 25519 11 225954 221089 114190 41614 40175 26958 1g 246503 269447 91246 42866 40574 29184 ap 268973 266321 93898 42244 42191 31145 :t 293410 288065 99243 51747 50187 32745 3v 291551 291396 99398 45006 45848 31738 ac 300063 328547 70914* 49290 51066 29456 )urce: Metals Industry Survey, Aluminum Monthly, U. S. Department of Interior, Bureau of Mines, Washington, D.C. )ecember, 1968 inventory data do not correlate with other monthly data )ecause of a revised reporting method by one firm. -A 22.... 4......ummflzr‘ A“ ' .0... A .. 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APPENDIX G Calculation of Linear Trend Lines The trend lines plotted in Figure 4 and Figure 6 follow the form of a linear equation: y = a + box (1) The values of a and b are determined from the normal equations: 2y = n-a + b'ZX (2) Zxoy = a-Zx + b-Zx2 (a where: x = a number assigned to each month in the series. y = value of the dependent variable. In performing the calculations, the value of x assigned to the central month in the series is O. The balance of the months in the series are numbered positively and negatively from the central month. This simplifying step establishes a condition where: EX = O (4) The normal equations then reduce to: 2y = n.a (5) a = EX n ZXGY = boZXZ (6) 209 — _—__1._._.x.__.__. A _._..-__...L_.L__._._.._.__‘.cu 210 Calculation of the Trend Line for Average Daily Total Deliveries The following summary of calculations follows the technique outlined above. These calculations cover total deliveries for the period 1960—1968. The values of the variables are: n = 107 Zy = l,372,831.4 ZX-y = 11,043,868.2 2x2 = 102,078 Substituting the above values in equation (5), the value of a is determined to be: a = lz372,831.4 107 a = 12,830.2 Likewise, substituting the above values in equation (6), the value of b is determined to be: h = ll,043,868.2 102.078 b = 108.2 The final equation for the trend line for average daily total deliveries is determined by substituting the values of a and b into equation (1): y = 12,83o.2 + 108.2-x 211 Calculation of the Trend Line for Average Daily Shipments The following summary of calculations, for the period 1960—1968, follows the procedure outlined above. The values of the variables are: n = 107 Zy = l,09l,79l.8 Zx-y = 6,573,545.2 2x2 = 102,078 Substituting the above values in equation (5), the value of a is determined to be: = 1,091,791.8 107 a a = lO,203.7 Substituting the above values in equation (6), the value of b is determined to be: h = 6,573,545.2 102,078 b = 64.4 The final equation for the trend line for average daily shipments, from equation (1), is: y = 10,203.7 + 64.4»x 4.4 L.Ml_mum._-.u4__ 0,33 w ‘ ~ 4 444*ln__‘_444._ 212 Calculation of the Trend Line for Average Daily Production The trend line for aVerage daily production covers the period 1961-1968“ The calculations follow the procedure outline in the above sectionn The values of the variables are: n = 95 2y = 688799lu8 zxoy = 30371929003 2x2 = 747440 The value of a is determined from equation (5): a = 688999l.8 95 a = 79252.5 The value of b is determined from equation (6): b = 32371929003 74,440 b = 47.2 The final equation for the trend line for average daily production is: % i i W = 7g252°5 + 4702°X APPENDIX H EXAMPLES OF DISCREPANCIES IN REPORTED ALUMINUM INGOT CAPACITY, 1959—1968 The following list of discrepancies in the reported capacities of aluminum ingot reduction plants is not an exhaustive list. It is included to acquaint the reader with selected sources of information on aluminum ingot capacity, and to illustrate the type of discrepancies ob— served during the study. Example 1: The Minerals Yearbook, 19621 reported the 1962 year end capacity of Harvey Aluminum at 75,000 tons per year. The Aluminum Association2 reported the capacity at 80,000 tons per year. Example 2: The Minerals Yearbook, 19643 reported the 1964 year end capacity for Kaiser Aluminum and Chemical Co. at 609,000 tons per year. The Aluminum Association reported the capacity at 650,000 tons per year. The same two references reported the capacity of Anaconda Aluminum Co. at 67,500 and 67,000 tons per year respectively. lMinerals Yearbook, 1962, U. S. Department of the Interior, Bureau of Mines (Washington: U. S. Government Printing Office, 1963), p. 217. 2"1967 Aluminum Statistical Review” (New York: The Aluminum Association, 1968), pp. l2—l3. ‘ f \ 3Minerals Yearbook, 1964, Op. cit., p. 187. 4"1967 Aluminum Statistical Review," loc. cit. 213 ‘ 214 APPENDIX H-—Continued Example 3: The Minerals Yearbook, 19655 reported the 1965 year end capacity for Ormet Corporation at 185,000 tons per year, while the Aluminum Association reported the same capacity at 184,284 tons per year. Example 4: The following discrepancies occurred between published data in the Yearbook of the American Bureau of Metal Statistics7 and The Aluminum Association.8 These data cover the year end capacity for 1965. American Bureau of The Aluminum Producer Metal Statistics Association Anaconda 65,000 tons per year 100,000 tons per year Intalco 76,000 tons per year —0- tons per year Ormet 180,000 tons per year 184,284 tons per year J An additional discrepancy, covering 1965 year end capacity for Kaiser Aluminum and Chemical Company, occurred between The American Metal ; Market and The Aluminum Association. These two publications reported the capacity at 609,500 tons per year and 650,000 tons per year respectively. 5Minerals Yearbook, 1965, op. cit., p. 167° 6"1967 Aluminum Statistical Review,” loc. cit. 7Yearbook of the American Bureau of Metal Statistics (York: The Maple Press Co., 1966), p. 96. l I 1 l 8”1967 Aluminum Statistical Review,” 10c. cit. ‘ \ 9Metal Statistics 1965 (New York: The American Metal Market Co., 1965), p. 549. 10”1967 Aluminum Statistical Review," loc. cit. 215 APPENDIX H--Continued Example 5: The following discrepancies occurred between published data in The Yearbook of the American Bureau of Metal Statistics11 and The Aluminum Association. These data cover the year end capacity for 1967. American Bureau of The Aluminum Producer Metal Statistics Association Intalco 100,000 tons per year 152,000 tons per year Kaiser 650,000 tons per year 670,000 tons per year Ormet 180,000 tons per year 184,284 tons per year Example 6: The following discrepancies occurred between The American Metal Market and The Aluminum Association, 4 covering 1968 year end capacities. American Bureau of The Aluminum Producer Metal Statistics Association Alcoa 1,150,000 tons per year 1,200,000 tons per year Kaiser 670,000 tons per year 690,000 tons per year Reynolds 855,000 tons per year 895,000 tons per year 11Yearbook of the American Bureau of Metal Statistics (York: The Maple Press Co., 1967), p. 98. 12"1967 Aluminum Statistical Review,“ loc. cit. l3Metal Statistics 1969 (Somerset: The American ______________________ Metal Market Co., 1969), p. 75. 14"1968 Aluminum Statistical Review” (New York: The Aluminum Association, 1969), pp. 12—13. l I * * WW i .r.:.