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Price determination in the electrolytic aluminum industry: The role of electricity prices

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  • Shi, Wenming
  • Wang, Ganggang
  • Zhao, Xu
  • Feng, Xuehao
  • Wu, Jun

Abstract

As a typical energy-intensive industry, the cost of electricity constitutes more than 40% of the total production cost of electrolytic aluminum in the China's electrolytic aluminum industry, suggesting the presence of co-movements between electricity prices and electrolytic aluminum prices. However, in the case of China, the common belief that electricity prices and electrolytic aluminum prices are correlated was not supported by the observed inconsistent frequent changes over the last decade, particularly after the 2008 financial crisis. To account for such inconsistency, this paper explores the incomplete transmission of electricity prices to electrolytic aluminum prices by employing a structural demand-supply model where market power, rotated demand, and quantity-dependent marginal cost in the electrolytic aluminum industry are incorporated. Empirical results show that there is a relatively stronger transmission effect of electricity prices on marginal cost of producing electrolytic aluminum but a much weaker transmission effect on the equilibrium price of electrolytic aluminum. Results from decompositions of electrolytic aluminum prices and marginal cost not only confirm the presence of incomplete price transmission, but also reject two conventional explanations concerning market power and input costs. In addition, a potential theoretical explanation is proposed to facilitate understanding the evolution of electrolytic aluminum prices.

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  • Shi, Wenming & Wang, Ganggang & Zhao, Xu & Feng, Xuehao & Wu, Jun, 2018. "Price determination in the electrolytic aluminum industry: The role of electricity prices," Resources Policy, Elsevier, vol. 59(C), pages 274-281.
    • Handle: RePEc:eee:jrpoli:v:59:y:2018:i:c:p:274-281
    DOI: 10.1016/j.resourpol.2018.07.014
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    Cited by:

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    2. Yang, Mian & Yuan, Yining & Sun, Chuanwang, 2021. "The economic impacts of China's differential electricity pricing policy: Evidence from energy-intensive firms in Hunan Province," Energy Economics, Elsevier, vol. 94(C).
    3. Li Li & Jiadong Zhu & Guanqiong Ye & Xuehao Feng, 2018. "Development of Green Ports with the Consideration of Coastal Wave Energy," Sustainability, MDPI, vol. 10(11), pages 1-17, November.

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    More about this item

    Keywords

    Incomplete price transmission; Electricity and electrolytic aluminum prices; Structural demand-supply model; Cost decomposition;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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