Short-run demand and supply elasticities in the West European market for secondary aluminium

As the principal user of old scrap, secondary aluminium smelters and refine rs have traditionally played a key role in the recycling of aluminium, prod ucing primarily cast material demanded primarily by the automobile industry . The purpose of this paper is to explore the supply-demand relationships i n the market for secondary aluminium alloys. Based on a standard microecono mic model, where the determinants of supply and demand are identified, an e conometric model, using data from Germany, France,Italy and the UK for the time period 1983-97, is estimated. The model is used to assess the relative importance of the factors determining the supply and demand of the Europea n secondary aluminium industry. The results show that both the supply and t he derived demand for secondary aluminium is own-price inelastic, which is reasonable given the short-run framework. On the demand side, the level of auto production is found to have a substantial impact on the level of secon dary aluminium alloy demand. We conclude that the model describes the marke t reasonably well. The inelastic supply in combination with the sensitivity to changes in the level of auto production provides a tentative explanatio n of the observed volatility in secondary aluminium prices. Furthermore, th e inelastic supply responses indicate that policies aimed at increasing rec ycling using price-based incentives will be inefficient. (C) 2000 Elsevier Science Ltd. All rights reserved.