Journal of Energy Markets

Risk.net

The impact of energy costs on industrial performance: identifying price and quantity effects in the aluminum industry using a data envelopment analysis approach

Nadia Kpondjo, Frédéric Lantz, Anna Créti and Christian Pham Van Cang

  • We use a two-stage model to look at the impact of energy costs and external factors on primary aluminum production unit’s performance on four years. We observed that on the whole, aluminum smelters were technically efficient when considering the Farrell efficiency measures, with very little difference between regions and technologies. This result can be attributed to certain characteristics of the production process along with high capacity utilization.
  • By considering the Tone cost efficiency scores (simultaneously taking into account the price and quantity effects), we highlight the fact that efficiencies are differentiated depending on geographic region and production technologies. This approach seems to better reveal differences in efficiency among aluminum smelters, which were not actually highlighted using the Farrell approach. This could explain the loss of competitiveness observed in certain industrial units in recent years.
  • We then highlight other factors that impact cost efficiency, such as global market share, multinational status and the exchange rate with respect to the dollar. These latter factors have a significant, positive effect on relative efficiency in terms of aluminum smelter costs. These results provide a better understanding of the reasons for changes in this industry, which has been marked by major technological and economic shifts and permit an assessment in the role of energy in these changes.
  • It should be noted that the excess capacity versus demand seen in this sector is a fundamental condition for competition. Thus, competition would determine efficiency within the industry, along with the other noted factors. It is important that stakeholders in the industry continue to improve the energy efficiency of the electrolysis process, while reducing its environmental impact.

We build a frontier function model with technical and cost efficiency measures to assess the impact of energy costs on competitiveness in the aluminum industry, a heavy energy consumer, by identifying what may be attributed to price and quantity effects. First, we estimate a data envelopment analysis model and measure the efficiency scores using the Farrell and Tone approaches. Then, we explain efficiency scores with a set of environmental factors using a truncated regression model, applying the double-bootstrap method proposed by Simar and Wilson in 2007. By considering the Tone efficiency scores, we highlight the fact that efficiencies are differentiated depending on geographic region and production technologies. This could explain the loss of competitiveness observed in certain industrial units in recent years. We also highlight other factors that impact cost efficiency, such as global market share, multinational status and the exchange rate with respect to the dollar. These factors have a significant, positive effect on relative efficiency in terms of aluminum smelter costs. Our results provide a better understanding of the reasons for the changes in this industry, which has been marked by major technological and economic shifts, and allow us to assess the role of energy in these changes.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: