Investments in primary aluminium production: location choice and the impact of electricity price

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Primary aluminium production requires huge amounts of electricity. The cost of electricity is thus of great importance for firms in the industry. Electricity prices in the western world tends to increase over time at the same time as many producers face expiring long term power contracts, thus resulting in increased production costs and reduced competitiveness. Hence, reports from media suggest a growing tendency towards a re-location of capacity to countries capable of offering cheap electricity. This study was carried out in order to shed further light on which factors firms in the industry consider in their choice of location for investments. The purpose of this thesis is to explore the determinants of investment in primary aluminium production and asses how these determinants affect location choice for investments. Using smelter-level data on a majority of the world's primary producers, a count data analysis was performed in order to asses the impact of factor prices and agglomeration effects. Due to the lack of country-level data for key variables, smelters were grouped into 12 regions. Contrary to expectations, no significant evidence was found for the importance of electricity prices. However, access to cheap labour and agglomeration effects appears to attract investments. This implies that high levels of sunk costs make firms prone to upgrading existing capacity, but may also sug...