What are the Framework Conditions for the Aluminum Project in Greenland?
Framework conditions are the factors that influence an industry. Among other things the framework conditions decide the expenses a particular aluminum project has. This goes for both costs in the construction phase as well as operating costs.
There is one factor especially which influences the aluminum industry and its framework conditions and that is the geographic location of a project.
Geographic location is important since it decides the competitive advantage of a project. One of the reasons for this is that the terms of energy supply, which is of major importance to the aluminum industry, is dependent on geographic location. In Greenland there is access to hydropower while in China for instance the industry is highly dependent on coal and gas for energy supply and at the same time the demand for energy from other industries is very high. Other factors that are also dependent on geographic location are construction costs, the price and quality of labor, transportation expenses, political stability, taxes etc..
When regarding construction costs, labor is an important factor for a project. There are wide differences in salary levels around the world and this difference is significant when constructing an aluminum plant. Since all aluminum plants compete on a global level the construction costs can be crucial when assessing the competitiveness of a project.
Another relevant framework condition is climate politics. This framework condition has a large influence on the operating costs of an aluminum project. Different countries have entered into different obligations regarding climate and this framework condition is therefore also dependent on location. This result in the fact that the aluminum industry in some countries must pay energy taxes while other countries have not entered into the same obligations. This may of course change over time as climate politics become more important. This is one of the reasons why the aluminum industry looks for opportunities to use sustainable energy sources which are more environmentally friendly and therefore lessens the risk of future energy taxes for the industry.
Originally the aluminum industry was based in the Western industrialized countries. In the later years however, there has been a rapid development in Asia and the Middle East. This is due to the framework conditions that these regions are able to offer the aluminum industry and the region’s growing domestic markets. The figure below shows the most important costs of the aluminum industry in 2011. During the construction phase labor is the most important cost while in the operating phase energy (defined in the below figure by gas prices) is of the highest importance. The figure shows differences in costs in different regions.
Source: McKinsey Energy Practice and DUBAL (2011)
The location of an aluminum project and thereby its framework conditions are determining factors in the planning of new projects. A new project must be globally competitive and costs must be evaluated in comparison to costs of similar projects in other locations.
The aluminum project in Greenland is in a good position in regards to operating costs, since Greenland is able to provide the industry with sustainable energy. On the other hand relatively high costs are to be expected in the construction phase. If a future aluminum industry is to be located in Greenland it is necessary to evaluate the combined package of framework conditions that the country can offer the industry. If the combined framework conditions are not globally competitive it may result in the industry making the decision to place the project in another country instead. The precondition for the aluminum project in Greenland to be realistic is that the framework conditions altogether make the project profitable to the investors.