The government owned National Aluminium Company (Nalco) is conceived in a way as to leave it with considerable export surplus of alumina, the intermediate material between bauxite mineral and aluminium. In the last five years, the low and high points of Nalco’s exports of alumina were 702,554 tonnes and 862,616 tonnes.
The company’s export surplus of alumina will rise coinciding with the refinery at Damanjodi in Orissa soon getting expanded to 2.1 million tonnes. The surplus will be over a million tonnes even assuming that the expanded 460,000-tonne smelter will be run at more than installed capacity, as is the long time practice with Nalco. Being in the government domain, caution and keeping risk taking to the minimum remain the hallmark of Nalco’s export marketing.
That explains why Nalco will be selling the very major part of its surplus alumina in the world market on a long-term contract basis. The company cannot, however, be faulted for erring on the side of caution since volumes of world spot trade in alumina continue to remain thin and prices of the chemical per se are not found to be transparent.
But thanks to some path-breaking initiatives by the likes of Alcoa, BHP Billiton and Rio Tinto (with Alcan under its fold), the nearly three-decade old practice of consigning alumina production to long-term sales contracts with prices linked to anything between 12 and 17 per cent of LME traded prices of aluminium will now be progressively giving way to selling the intermediate material on short-term contracts.
Quite a few such transactions have happened with alumina prices settled on the basis of an average weighting against multiple price indexes. But are any of the indexes becoming the favourite with sellers of alumina? Maybe a little too early for that to happen because all these are now tried out. At the same time, an Alcoa official is openly appreciative of Platts, the world’s leading provider of metals information, for the “time and effort” it has spent in developing its index.
Platts Alumina Index (PAX), introduced in August, offers four daily spot price assessments. Justifying the need for PAX, a Platts official said at the time of its introduction that as “alumina has been priced annually as a differential to aluminium,” the industry does not have a “realistic gauge of pre-smelter value.”
PAX is designed in a way as to faithfully capture “price dynamics” relating to Australia, the world’s biggest producer of alumina and China its biggest user.
The price formula in vogue, which is sought to be replaced gradually by short-term index linked rates, has not fetched alumina what it deserves or captured the underlying cost, including transport. Alumina buyers should not have missed what was coming for them once BHP resolutely overcame all resistance earlier this year to move iron ore sales on a quarterly spot-averaged price basis from annual rates.
In fact, from to time the market gets to hear that quarterly price arrangement will be moved to a monthly order to better capture spot prices. Remember, China, which should be ending this year with iron ore imports of around 600 million tonnes, opposed tooth and nail the fixing of ore prices on a three month basis. But what won the day for ore producers was market dynamics.
If the new pricing formula for alumina is not inviting a torrent of protests as was seen in the case of iron ore and coking coal, it is because many leading producers of aluminium outside China have good linkages to bauxite mines and refineries.
Look at Alcoa, BHP and Rio. All of them are big producers of aluminium but still they have considerable surplus of alumina. However muted that may be, protests against the price change formula are there. To give one example, Aluminium Bahrain has opposed the change. Some others too have shown their discomfort.
Alumina sellers too are not rushing with the new marketing idea. Alcoa will take five years to roll out the new pricing plan, as it will convert 20 per cent of its customers to contracts linked to indexes a year. No one seems to be in a hurry. Those in the forefront pushing for a change will see how the whole thing pans out and also the response of other sellers to short-term contracts using indexes as the basis for price determination.
There is much merit in the argument that alumina, though an intermediate product should be priced against its own fundamentals. In this context, an Alcoa official says: “the one thing that you see is the fundamentals of alumina refining business do not get reflected in the LME price (of aluminium). That’s the fundamental reason why we think there should be a change in how alumina is priced.”
The other day an Indian company spot sold 30,000 tonnes of alumina at a price of $371.88 a tonne commanding a marginal premium on Platts index at that point. The new regime will allow signing of multi-year contracts linked to index pricing. Buyers will have the assurance of supply and sellers of right prices through the contract period.
