Prices traditionally derived from the rates at which the white metal is sold on LME.
Braving stiff opposition from steelmakers in China in particular and also of the steel industry in the rest of the world, leading miners like BHP, Vale and Rio last year dispensed with annually negotiated long-term contracts in favour of first quarterly arrangements and now for even shorter-period contracts. Some miners, BHP in particular are booking an increasing proportion of their iron ore business on monthly contract basis so that the prices “faithfully” capture the often rapidly shifting market dynamics. India, a major exporter of iron ore to China, is selling the mineral on monthly contracts or at spot prices.
No doubt, producers of alumina, an intermediate chemical derived from bauxite and fed into smelters to make aluminium, have drawn inspiration from new methods of selling iron ore to evolve ground breaking rules for pricing alumina contracts. Like for iron ore, metal makers had reservations about index-based alumina pricing when was proposed in 2010. But as the proceedings of a recent alumina summit in the US will confirm, the new system is gaining traction. Even then as an official of Aluminium Bahrain says, a “big concern or challenge is that the spot market (for alumina) is small, which can create a lack of liquidity in the indices. We (therefore) still prefer LME-linked contracts due to the hedge and the correlation between the two (alumina and aluminium.)”
Alumina prices traditionally are derived from the rates at which the white metal is sold on LME. The chemical has been fetching 11 to 14 per cent of aluminium prices. But in a practice like this what is not reflected in alumina prices are costs on account of caustic soda, energy and shipments. For new alumina capacity to be built, it is essential that chemical prices in all situations should prove to be rewarding for producers. Often in the past, alumina makers were deterred from making investments in new capacity building as the returns from chemical sales were not proving adequate. A Rio Tinto Alcan official is hopeful that index-based pricing will “give a good signal that alumina prices should be linked to potential investments because somewhere along the line, there will be a shortage.”
Hydro, the Norwegian aluminium group, has in a recent research paper forecast that a likely significant world demand growth for the metal will push the metal use to rise from 41 million tonnes in 2010 to 74 million tonnes in 2020. Incidentally, China, the powerhouse for all metals, will, according to Hydro findings, account for half the world demand for aluminium in 2020. As two units of alumina are needed to make a unit of the metal, the world will need a supply of at least 148 million tonnes of the chemical in 2020.
There are two issues here. First, the integrated metal enterprises, as also the stand alone alumina makers will be engaged in an increasingly fierce contest to get access to bauxite deposits. Second, both the groups have seen merits in moving away from alumina contract prices based on relative to LME metal rates to index-based pricing. As in the case of iron ore, alumina sellers have got quite a few indices to refer to in order to arrive at contract prices. The migration to the new index-based pricing of alumina began in the second half of last year, with most major producers referring to an index or a basket of indices for selling the material, including long-term contracts.
Alcoa, the world’s largest third-party seller of alumina and the biggest producer of the metal in the US, is using a basket of indexes to get as close to the underlying costs of making the chemical as possible and also in order not to be seen as favouring one index over the other. Indices produced by Platts, Metal Bulletin and CRU have become the principal reference points for arriving at alumina prices.
Alcoa is making contracts using a monthly average of a basket of published alumina prices. As this practice is taken forward, there should be fine tuning of it to address concerns like “there is much more frequent repricing of the percentages (alumina vis a vis the metal) as a result of new indices” voiced by Aluminium Bahrain.
We have to see how our own National Aluminium Company (Nalco) is going to react to the decoupling of alumina prices from the metal prices. After all, Nalco, the country’s best integrated aluminium group, is a major exporter of alumina after meeting the full requirements of its 460,000 tonne smelter in Orissa.
Nalco’s alumina exports, however, fell to 686,000 tonnes in 2010-11 from 702,554 tonnes in the previous year because of growing own requirements. There is no reason why Nalco will not respond positively to the maturing indexed pricing of alumina, which in all situations will more than defray production costs on all heads, irrespective of how aluminium behaves on LME. In the next few years, however, as the company builds a second smelter in Orissa and also puts up a 500,000-tonne smelter in Indonesia, it will not be left with any surplus alumina for exports.
