Alumina says pricing system must change

Alumina Ltd says the current pricing system for alumina does not reflect industry fundamentals and that contract pricing will move towards spot pricing over several years.

Alumina's business is a 40 per cent interest in Alcoa World Alumina and Chemicals' (AWAC) global network of seven bauxite mines, eight alumina refineries, and two aluminium smelters.

Bauxite is refined into alumina, which, in turn, is smelted to produce aluminium.

Alumina chief executive John Bevan said in presentation slides to the UBS Australian Resources conference in Sydney on Thursday that alumina prices were in transition, which would be beneficial for Alumina.

The availability of quality bauxite was diminishing, and China was seeking more bauxite projects to accommodate its economic growth.

Alumina refiners that did not have co-located sources of bauxite (non-integrated refiners) were exposed to having to import bauxite by ship, which was a more expensive process.

The cost of building new refining capacity was also growing, and the current pricing model linking alumina to aluminium on the London Metal Exchange (LME) did not reflect alumina production costs and would not provide incentive for new capacity.

There was a low correlation between LME aluminium prices and alumina input costs, and margins had become volatile.

"(The) current pricing system does not reflect alumina industry fundamentals," a presentation slide said.

"Non-integration means the alumina pricing should increasingly reflect industry supply/demand conditions and marginal producers' costs."

Alumina said one-third of China's bauxite needs were imported, and Chinese alumina contracts were predominantly short-term or spot.

Structural change in the alumina market was being driven by developments in the Chinese industry, which would increase the volume and importance of the spot market.

Over the past 12 months, the average spot price had been 17 per cent above the composite price (a weighted average price for a number of key importing and exporting countries).

"Contract pricing will move towards spot over a period of several years as current linkage-based contracts roll off," Alumina said.

"A new pricing mechanism should evolve with more spot sales outside China, possibly leading to a fundamentals-based alumina price index."

Alumina shares were two cents higher at $1.65 at 1316 AEST on Thursday.