9-799-130
REV: MARCH 11, 2002

KENNETH S. CORTS

Aluminum Smelting in South Africa: Alusaf's
Hillside Project
At the beginning of 1994, Alusaf was considering building the world’s largest greenfield primary aluminum smelter, a 466,000-ton-per-year smelter at Richard’s Bay, a deepwater port on the east coast of South Africa’s province of Kwa-Zulu Natal. Alusaf was the sole primary aluminum producer in South Africa, operating 170,000 tpy of capacity at the existing “Bayside” facility at
Richard’s Bay. Alusaf’s 1993 revenues were $220.2 million, up 1% from 1992. Income was $8.6 million, up 122% from 1992.
A feasibility study for the proposed “Hillside” smelter had been completed over the past two years. During this time, South …show more content…

The Hillside Project
Escom, South Africa’s electrical power utility, initiated discussion of the Hillside project with
Alusaf in mid-1991. With aluminum prices around $1,300 per ton, Alusaf had suggested to Escom that the Bayside smelter was not economically viable given market conditions and might be shut down. Escom responded with an offer to reduce power rates dramatically if Bayside were kept open and an additional facility at Richard’s Bay constructed.
Escom offered to supply the smelter’s approximately 680 Mw electricity requirements under an unusual long-term contract. About half the world’s smelters operated under contracts guaranteeing discounted electricity for multiple years; often these contracts tied the price of electricity to the price

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This document is authorized for use only in PGDM 1st Year - 1007 by Rakhi Singh at IILM Institute for Business and
Management, Gurgaon (IILM-IBM, Gurgaon) from October 2013 to April 2014.

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of aluminum and employed complicated formulas that imposed caps and floors on prices. The 25year Escom/Alusaf contract was unique in its simplicity: Alusaf would pay Escom 16% of the per-ton price of aluminum for every ton of aluminum produced, assuming the plant produced at its designed efficiency. While the contract did contain provisions protecting Escom from inefficient production, it did not protect Escom against fluctuations in