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CONS:
The one major setback that Alusaf can face is short-term profits decline. We understand that with the presence of cheaper aluminum in the market, it is more than possible than Alusaf's aluminum would not find the same reception it did before. This means lower profits as demand for expensive aluminum declines.
The short-term decline in profits would be aggravated due to the fact that Alusaf had already invested a huge sum of money in the development of this smelter. In other words, the operating costs would initially be much higher than what Alusaf would ideally aim for. For this reason, initially at least for the first few years, Alusaf will either make no profits or its profit margins would shrink significantly.
The drastically low prices of aluminum i.e. $1,100 per ton has significantly shrunk the profit margin as previously the prices had been $2,500 per ton. The consistently declining prices due to the presence of cheap aluminum gives Alusaf even lesser dominance in an otherwise perfectly competitive market.
The fact that aluminum industry is perfectly competitively in SA means there are many competing firms and thus even the leader has only 4.1% share of the total demand. This doesn't work in Alusaf's favor now that cheaper aluminum has taken over the market.
ANALYSIS
The analysis of situation suggests that Alusaf will definitely face serious shrinkage in profits in the short-term. However it still must continue with...
If Alusaf is focusing on the long-term which it must, then it should not stop the project because it will lose more with the sudden closure of the project than it ever will if it continues with it.
Alusaf also must study the trends of the market more closely to find out if the decline in the prices is simply due to cheaper aluminum or if there are some other reasons for it. This kind of study is important because it will be able to determine if Alusaf is on the right track or not. On the surface and from the available information, it seems that the only reason Alusaf is worried is because of the presence of Russian aluminum and declining prices. But if there are no other reasons for the decline in prices then Alusaf can rest assured that it will soon be able to rake in profits once the Russian supply depletes.
The smelter project is a long-term issue and must be handled in similar fashion. In such a case, short-term profits decline can be ignored in favor of long-term profit gains. Alusaf has been in the market for long enough to understand that temporary decline in prices due to cheaper supply cannot possibly cause major damage in the long run unless Russian come up with a permanent source of cheap aluminum. For now, however it seems that Russian supply of aluminum is limited and they are only trying to get rid of the excess inventory.
Alusaf must thus continue with its development project.
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