The Primary Aluminum Industry
as a Complex Adaptive System
David L. Olson
James & H.K. Stuart Chancellor’s
Distinguished Chair
Full Professor, University of Nebraska
Complex Adaptive Systems
& Supply Chains
• SYSTEM ORGANIZATION
– Uncertain, frequent, transaction-oriented business leads
to organizations (Williamson, 1981)
• MARKETS – work well with straightforward exchanges, but high
levels of uncertainty (& variance)
• HIERARCHIES – cope with bounded rationality, but inefficient
• SUPPLY CHAIN SYSTEMS
– Autopoeisis - Systems have a life of their own (Maturana &
Varela, 1988)
• Rockefeller’s Standard Oil a HIERARCHY
– VERTICAL INTEGRATION
– Supply Chain organizations evolve
• MARKET – transaction cost analysis theorizes switching point
– SUPPLY CHAIN
Aluminum System
• Bauxite
– Very common mineral, but highly variable in quality (amount of
dirt needed to get ton of alumina)
– Strip mines
• Alumina
–
–
–
–
An aluminum oxide
Created by processing dirt in REFINERY
Lots of capital required
Since volume of dirt high, tend to locate near mines
• Aluminum
– Fry Alumina, get rid of slag, end up with Aluminum
– SMELTERS – use prodigious quantities of electricity
– Since electricity the main cost, tend to locate near cheap power
System
• 19th Century
– Europe mined bauxite (Pechiney), depleted
• 20th Century
– US mined (Alcoa), depleted all but Arkansas
– Shifted to Canada (Alcan), depleted bauxite
• 1960s
– Alcoa, Alcan, Pechiney obtained rights to Caribbean sources (Jamaica;
Surinam; Guyana)
• 1970s
– Inspired by OPEC, Caribbean sources instigated IBA (International
Bauxite Association)
• 1980s
– Australia joined IBA, but lowered price, took over world market
– IBA basically failed
World Bank Forecast
Brown et al. [1983]; web actual(2000)
World Aluminum Demand
40000
35000
30000
25000
20000
15000
10000
5000
0
1965
1970
1975
1980
Actual
1985
Low
High
1990
1995
2000
Aluminum Industry Countries
SECTOR
Countries involved in Aluminum
LDC (developing countries)
Jamaica, Haiti/Dominican, Guyana,
Surinam, Brazil, Venezuela
Ghana, Guinea, Sierra Leone, Cameroun
India, Indonesia, Malaysia
Turkey, Mexico, Argentina, Egypt, Zaire,
South Africa
ASEAN, Korea/Taiwan, Mideast
OECD (developed countries)
USA
Western Europe
Australia
Canada
Japan
Communist
Eastern Europe (Yugoslavia)
USSR
China
Network Model Variables
• Mines (22)
http://www.mapsofworld.com/minerals/world-bauxite-producers.html
http://www.indexmundi.com/en/commodities/minerals/bauxite_and_alumina/bauxite_and_alumina_table11.html
– Ore quality variable
– Each site capacity limited
• Refineries (84)
– Type of ore affects conversion output
www.world-aluminium.org/statistics production/capacity
• Smelters (29)
http://www.mapsofworld.com/minerals/world-aluminium-producers.html
• Demands (18)
– Year 2000 forecasts
Supply Chain System Network Features
Elements
Agents
Actors – suppliers, manufacturers, retailers,
customers
Partnerships & alliances
Interaction
Resources & activities
Resource exchange (finance, information,
knowledge)
Autonomy
Relative degree of independence of operation
Learning
Knowledge exchange & development
Key Events – 1970-2000
• The International Bauxite Association was formed
in the early 1970s.
• In the 1980s Australian mining interests operated
in competition with rather than in cooperation
with the IBA, gaining a large market share
• In the late 1980s the Chinese government
encouraged free market development
• In 1990 communism for the most part was
replaced with new freer market economies
Demand
Demand for Aluminum 1980-2013
Thousand metric tons/year
60000
50000
40000
30000
20000
10000
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
0
1
2
3
4
5
6
7
8
9
10 11 12 13
Price
Price of Aluminum 1950-2010
Dollars/Pound
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Price
Primary Aluminum Price - 2003-2014
Dollars per pound
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Expropriation by Industry Group
1960-1974
INDUSTRY
Number of expropriations
% of Total
Oil
84
12.0
Extraction
38
18.0
Utilities & Transportation
17
4.0
Insurance & Banking
33
4.0
Manufacturing
30
1.2
Agriculture
19
NA
Sales & Services
16
NA
Land, Property &
Construction
23
NA
MINES
• WORLD BANK
– More in Caribbean
• NETWORK
– Close
– We got more in East Europe, China
– Venezuela & Brazil compromise locations
– If high risk, Australia high
• Despite large cost disadvantages
Bauxite
World Bauxite Production
(thousand metric tons/year)
300000
250000
200000
150000
100000
50000
0
1970
1975
1980
1985
1990
IBA Total
1995
BRICS Total
2000
2005
Europe/US
2010
WORLD
2011
2012
2013
2014
IBA Bauxite
IBA Bauxite Production
(thousand metric tons/year)
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
1970
1975
1980
1985
Jamaica
1990
1995
Australia
2000
Suriname
2005
Guyana
2010
2011
Guinea
2012
2013
2014
Refineries
• High capital costs
• Cost advantage close to mines
• WB – sited at mines
– Jamaica, India, ASEAN
• As Risk Alpha increased
– Brazil, Venezuela, Korea, Australia
• High Risk Alpha
– Zero in LDCs
Refining
Alumina Production
(thousand metric tons/year)
120000
100000
80000
60000
40000
20000
0
1970
1975
1980
1985
WORLD
1990
1995
IBA
BRIC
2000
Europe/NA
2005
2010
2011
2012
IBA Refining
IBA Alumina Production
(thousand metric tons/year)
25000
20000
15000
10000
5000
0
1970
1975
1980
1985
Australia
1990
Jamaica
1995
Suriname
2000
Guinea
2005
Yugoslavia
2010
2011
2012
Smelters
• Close to electricity
• WB – forecast high growth in LDCs
• ACTUAL
– Canada (government subsidized hydropower)
– Australia
Smelting
Aluminum Production
(thousand metric tons)
60000
50000
40000
30000
20000
10000
0
1970
1975
1980
1985
WORLD
1990
USA
1995
Russia*
2000
2005
Canada
2010
China
2011
India
2012
2013
2014
Trade Networks
• 1970s
– Caribbean – US very strong
• 1980s
– Australia – Japan grew
– Caribbean declined
• 2008
– Australia, Brazil, Indonesia, Jamaica, Guinea expert
– Russia, Spain, Canada, Norway production centers
– US, China, Japan import final product
• Current
– Southern hemisphere primary resource supplier
– Production, consumption Northern hemisphere
Complex Adaptive System Elements of Supply Chains
Internal
Mechanism
CAS
Agents
Descriptions
Agents share interpretive and behavioral rules
Self-organization
& emergence
Patterns created through simultaneous and
parallel actions
Extensive inter-relationships possible
Extensive inter-relationships possible
Negative feedback and controls reduce
dimensionality
Autonomy and decentralization increase
dimensionality
Changes constant and inter-dependent
Global optimization simple if criteria independent
Complex if criteria inter-dependent
Attractors sensitive to change with variance from
equilibrium
Connectivity
Dimensionality
Environment
Co-Evolution
Dynamism
Rugged
landscape
Quasiequilibrium
& state change
Non-linear
change
Non-random
future
Lack of linear correlation between cause and effect
Common patterns of behavior observable
Linkage of Complex Adaptive System Elements and the Aluminum Production System
Internal
Mechanism
CAS
Agents
Self-organization
& emergence
Connectivity
Environment
Co-Evolution
Dimensionality
Dynamism
Rugged landscape
Quasi-equilibrium
& state change
Non-linear
change
Non-random
future
Aluminum system
Customers
Firms (seek to control supply chain)
Host countries (set tariffs; implement energy policy)
International Bauxite Association (seek to set price)
Response of Jamaica, Guyana, Surinam
Australian response
China
Degree of coordination
Independent action of Australia
Firms become subordinate to host governments
Rule enforcement within IBA
Market – demand/price
Emergence of China
Collapse of Yugoslavia, USSR
IBA difficulty in anticipating consequences of formation
New balances:
Australian, Guinean bauxite
Chinese in all three sectors
IBA action in 1974
Chinese growth in 2000s
New alumina entrants (Ireland, Spain)
New aluminum entrants (Iceland, Bahrain)
Aluminum Supply Chain CAS
• Shifting alliances
– 1970s bauxite dominated by Caribbean
– 1980s saw Australia dominate
• Unintended consequence of IBA
– Emergence of China in world economy
– New alumina facilities – Ireland & Spain
• Guinean bauxite
• Norwegian, Icelandic smelting
– Mid-East smelting with flare gas
Aluminum Supply Chain CAS
• Adaptive behavior
– First, IBA broke central hierarchical control of
oligopolies
– BUT: IBA induced Australian growth
• MARKET replaced VERTICAL HIERARCHY
• Additional dynamics
– Breakup of Communism
• Yugoslavia
• Russia