Magnesium Price Drop Lowers Aluminum Alloy and Die Casting Costs
Falling magnesium benchmarks lower material costs for buyers using aluminum alloys or specialized automotive components.
Smelting Costs
Expense Structure
Financial outlays required to extract base metals from their ores constitute the primary economic barrier to entry for metal production facilities. These smelting costs include electricity, labor, raw material inputs and maintenance. Each facility operates on a marginal curve where the efficiency of the furnace determines the profit per ton.
Rising overheads can force older plants to stop operations.
Energy Intensity
Electrolytic and thermal reduction processes consume vast amounts of power to break the chemical bonds in mineral oxides. For many aluminum and magnesium producers, electricity accounts for more than one third of the total smelting costs. Facilities often locate near hydroelectric dams or coal mines to secure a stable and inexpensive power supply.
Hedging strategies for energy prices are common among management teams looking to stabilize their quarterly budgets.
Marginal Efficiency
Technological upgrades to the potline or furnace can reduce the amount of energy required for every kilogram of metal produced. Lowering the smelting costs through automation and better insulation provides a competitive advantage in a commodity market where prices are set globally. When market prices fall below the variable expense of production, managers must decide whether to continue operating at a loss or to curtail capacity.
This decision depends on the expected duration of the price slump and the cost of restarting the cells. In many cases, the high capital requirement for a restart keeps unprofitable plants running for several months after they have ceased to be viable.