China smelters eye spot alumina deals over term contracts

HONG KONG, Oct 19 （Reuters） - Chinese aluminium smelters are shunning term contracts for raw materials for 2011, and instead are betting spot supplies will remain competitive, a gamble that may see some units shut or cut output if they get it wrong.

Annual contract prices of alumina, the key ingredient in aluminium smelting, are set to rise towards 16 percent of the price of primary aluminium on the London Metal Exchange.

India's state-run National aluminium Co (NALCO） sold 270,000 tonnes of term alumina for 2011 at 15.83 percent of the monthly average LME aluminium price on an FOB basis, compared to 15.055 percent for 2010

A trading source at an international trading firm and a Chinese smelter official said many in the industry see prices above 16 percent of the LME price in 2011 from 14.5-15 percent this year, for Australian alumina, the most popular origin to Chinese smelters.

"Above 14 percent, many Chinese smelters would lose money using imported alumina. If they cannot remain profitable, they would prefer production cuts," said an international trade manager at a large smelter.

Instead smelters are hoping that spot prices remain low allowing then to operate at profit, or buy cheaper Chinese origin material. But that also comes with a risk. 

"What are they going to do? Buy in domestic market? They don't trust （other） domestic term contracts. They will have to buy spot and the market could change quickly," said a Western alumina producer source.

Foreign sellers say the reality is that many smelters have few options to secure stable alumina supplies in China as top domestic alumina producer Chalco prefers to sign term contracts and reliance solely on smaller alumina suppliers for spot deals is too risky.

Chalco has indicated 17.5 percent of Shanghai exchange prices for 2011 term shipments to local smelters, compared with 17-17.5 percent this year, smelter officials said.

LME aluminium MAL3 has risen nearly 20 percent in the second half of the year. Chinese aluminium prices SAFc3 gained 12 percent from the end of June to 16,390 yuan on Monday, capped by abundant supply in the world's top producing nation.

Still, high term prices for imported alumina have already spurred Chinese smelters to cancel at least one million tonnes of 2010 imports after strong LME aluminium prices pushed up term alumina prices above locally produced supplies for much of this year, smelter officials estimated.

Smelters bought Chinese spot alumina to replace imports, which dropped 22.4 percent in the first nine months of the year. In China, spot Chinese alumina traded at 2,700-2,800 yuan a tonne versus above 3,000 yuan for Australian term material.

"Many people are talking about 16 percent. We are thinking and have not offered yet," said an international trading firm broker whose firm sold term alumina to China.

China produced near 20 million tonnes of alumina in the first eight months of the year, up 38 percent from a year ago, and is expected to add at least 2.4 million tonnes of annual capacity next year.

Alumina demand was above 21 million tonnes in the first eight months of the year, based on the primary aluminium production for which two tonnes of alumina are needed for one tonne of metal production in China.

Adding to the uncertainty, smelters seeking new term imports also face a new price system as major Western alumina producers such as Alcoa plan to switch to index pricing.

"Basically, index pricing will use spot prices to lock up large amounts of term materials. We'd rather buy spot," said the smelter international trade manager, referring to spot buying in the international and domestic markets.