Alcoa leads alumina price shift

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Alcoa and BHP Billiton have begun selling some of their production of alumina, the raw material used to make aluminium, on contracts tied to price indices for the commodity, moving away from the historical link with aluminium that has governed the market for decades.

For about 30 years, the price of alumina sold on long-term contracts has been fixed as a percentage of the price of aluminium on the London Metal Exchange. Talks between alumina refiners and aluminium smelters have settled the ratio.

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But Alcoa, the world’s largest seller of alumina to other companies and biggest aluminium producer, has this year pushed for a shift to a pricing system independent of aluminium, in the face of resistance from some customers.

The move follows similar upheavals in the pricing of iron ore, which were fiercely contested between mining companies and steelmakers last year.

The shift in alumina pricing may be less controversial, because more aluminium smelters than steelmakers have their own sources of raw material, but there have been protests from buyers. Laurent Schmitt, chief executive of Aluminium Bahrain, told Metal Bulletin in September he opposed the move, and analysts say other smelters have been critical privately.

The price of alumina sold on long-term contracts has typically been set at 12-14 per cent of the price of aluminium. Alcoa argues that price formula has generally underpriced alumina and has not reflected the costs of production and transport.

Alcoa, with support from BHP, argues the long-term solution is pricing based on an index for alumina, and says it has already signed contracts on that basis with many of its customers.

Tim Reyes, president of Alcoa’s materials management business, said last week: “We always take a leading position, and this is a shift that we think is right. We are setting the pace with this, and we will see if it affects the whole industry.”

Other sellers are also changing the terms of their alumina contracts, including shifting from annual to quarterly pricing, and raising their prices relative to that of aluminium.

Alumina sellers have been using several indices for their contracts, but Mr Reyes highlighted Platts as a company that “has spent time and effort developing their index”。

Today the index price of alumina is in line with prices linked to aluminium. This week the Platts index has been about $368 per tonne, about 15.5 per cent of the price of the metal. However, if costs rise further, and the market tightens, the index price could diverge and the move could pay off for Alcoa and BHP.