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

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

Resources Policy, 2018, vol. 59, issue C, 274-281

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.

Keywords: Incomplete price transmission; Electricity and electrolytic aluminum prices; Structural demand-supply model; Cost decomposition (search for similar items in EconPapers)
JEL-codes: D22 L1 L11 L52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:59:y:2018:i:c:p:274-281

DOI: 10.1016/j.resourpol.2018.07.014

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