Short-run demand and supply elasticities in the West European market for secondary aluminium

Abstract

As the principal user of old scrap, secondary aluminium smelters and refiners have traditionally played a key role in the recycling of aluminium, producing primarily cast material demanded primarily by the automobile industry. The purpose of this paper is to explore the supply–demand relationships in the market for secondary aluminium alloys. Based on a standard microeconomic model, where the determinants of supply and demand are identified, an econometric model, using data from Germany, France, Italy and the UK for the time period 1983–97, is estimated. The model is used to assess the relative importance of the factors determining the supply and demand of the European secondary aluminium industry. The results show that both the supply and the derived demand for secondary aluminium is own-price inelastic, which is reasonable given the short-run framework. On the demand side, the level of auto production is found to have a substantial impact on the level of secondary aluminium alloy demand. We conclude that the model describes the market reasonably well. The inelastic supply in combination with the sensitivity to changes in the level of auto production provides a tentative explanation of the observed volatility in secondary aluminium prices. Furthermore, the inelastic supply responses indicate that policies aimed at increasing recycling using price-based incentives will be inefficient.