The alumina industry provides a product which is an intermediate stage in the production of aluminium. After bauxite is mined, it is refined into alumina, then the alumina is smelted into aluminium. Metal grade alumina refineries produce relatively close substitutes, in direct competition, for a common group of buyers, vis. aluminium smelters. The global alumina industry closely approaches an oligopoly, since there are relatively few sellers and there is a high degree of awareness of the conduct of other firms. The industry has been analysed using the perspectives offered by Bain and Porter. An attempt has been made to discern broad global trends in plant location, vertical integration and the factors critical to competitiveness, inter alia.
Traditionally there has been a high degree of vertical integration in the combined bauxite-alumina-aluminium industry. This level of vertical integration has declined in recent years, although the level of industry concentration is still higher in alumina than in aluminium. There are only about 40 alumina refineries in the world and much of the alumina produced is traded internationally. This reflects a strong and increasing tendancy to locate refineries near bauxite mines, while smelters gravitate toward cheap energy and the major markets. To be in the lower portion of the industry cost curve, refineries need to be very' close to a bauxite source, since a refinery is tailored to the characteristics of the bauxite used and low bauxite transport costs is a significant cost advantage, and to be of a large scale, since there are significant economies of scale.