London, 15 October 2011: Platts

Alumina producers are supporting spot index-based pricing in alumina contracts for 2012, even though there have been times this year that deals done on a percentage of the London Metal Exchange aluminum futures price have shown a better return.

More recently, the LME has fallen faster than the spot alumina price, with LME high-grade aluminum down nearly $500/mt since June to $2,178 as of Thursday's official cash settlement, while the Platts FOB Australia alumina price is down $42 to $355/mt.

"We haven't sold anything on an LME-linked basis since we said we weren't going to [in late 2010]," said Tim Reyes, president of Alcoa Materials Management. Reyes said Alcoa had done multi-year, arms-length contracts with smelters based on the alumina spot index.

Simon Storesund, Hydro Aluminium's general manager, commercial, bauxite and alumina, said all new alumina business being done by Hydro on a longer-term basis of more than one year will not be fixed against the LME.

"We are definitely trying to increase our contracts on the index," he said, while noting that contracts done on a shorter term of one year or less might have more variation in formulas, such as fixed price, banded etc.

Both Reyes and Storesund said the contract formulas for next year have tended to be baskets of different combinations of Platts FOB Australia alumina assessment (PAX Australia), Metal Bulletin and CRU. But Storesund also confirmed comments in July from Hydro's CEO that Hydro has done some shorter-term contracts that were based 100% on Platts.

As 2012 contract negotiations kicked off in September, some aluminum smelters continued to seek a formula based on a percentage of LME aluminum since it enables them to fix their cost against their selling price, and to possibly hedge on the LME.

But one official with a large smelter acknowledged that smelters tried this going into 2011, and the result was that negotiations reached an impasse and more business ended up being left to spot. The smelter official's view was that spot supply is plentiful, and if the balance stays the same the alumina price will keep dropping going into next year.

As a result, he thought he had detected less of a push by producers to do index-based pricing. But all major producers denied any weakening in their aim to go to index-based pricing.

"The price of the day is what we're moving toward," said a third producer source. "We are driving toward no new LME-linked contracts."

LEGACY LINKAGE

Credit Suisse has said a number of times that it regarded increasing exposure to spot alumina prices as a positive factor for producers, because they are higher than legacy linkage rates. Rusal said this week that for a second consecutive year it had agreed to buy Australian units from Alcoa for 2012 priced off a spot price index, also reselling some of the volume to China based on spot prices.

"We haven't found more people wanting to sign more LME-linked contracts -- in fact it's the opposite," said a fifth alumina producer source. "As the alumina price has dropped in the second half, and as the spot price percent versus the LME price rises, people don't want to sign up on an LME-linked price."

He noted that producers would have wanted 17% of the LME price in September when contract talks started, based on prices at the time. Currently the spot price equates to over 16%, versus 15% going into this year and well below that in prior years.

"It was hard to get people to sign up last year, but they did," the producer noted. "This year [the producers] told them they had a year to observe [the spot price], and they saw it didn't go up and up, and it went down second half. And when the price moved in the absence of trades, they could understand why, and it was in the ballpark."

The producers acknowledged that they might buy differently than they sell, however. They also said there were many existing  multi-year contracts linked to LME aluminum where the percentage has to be negotiated each year, often within a pre-determined put/call band. One producer reported some put/call settlements were done in September, with buyers at 15.25-15.50% and sellers at 15.75%.

A smelter source said in early September that the company was hoping to negotiate an LME percentage discount for 2012 of less than 15%, "but to be realistic I don't think it will happen." He was awaiting tenders from India's Nalco, which still sells on an LME-linked basis, to set the tone for 2012. Nalco's first tender settled at 16.1%, and this week Nalco awarded a second tender at 16.2%.

The smelter source has since said: "If the LME stays at the current level, then 16% is probably a fair number. But if the LME rises to $2,500/mt, then 16% would be too high."

STILL AVAILABLE

The smelter also had some index-formula contracts it was considering, tied to the published alumina spot price assessments, and wanted to leave some business open to the spot market. An Atlantic-based smelter source said he'd had recent offers at 15.50-16% of the LME but that there were still old put/call multi-year contracts around with levels of 11-14%.

"We will probably only buy spot," for any alumina not on multi-year deals, the smelter official said, though he thought LME-linked deals were still available.

One of the producer sources pointed out that FOB Australia deals for next year had so far gone at about 0.1-0.25% less than the Nalco deals. Market participants usually expect Indian cargoes to fetch a premium to Australia, derived from savings on freight to the Middle East. A 30,000 mt shipment from India to Dubai's Jebel Ali port typically costs about $15/mt less than a shipment from Australia.

Platts has noted that in the last year, the premium for India's spot cargoes has tended to range between $5 and $8/mt. For 2012, Nalco business has been at a premium of about $2-6 compared with FOB Australia business, the producer source said.

Alumina participants also have voiced mixed views on whether Nalco's term tenders are truly representative of the market. Tender results can sometimes be skewed, the smelter official said. Traders too, have said Nalco's tenders may attract an upcharge due to increasing difficulty in securing long-term percentage-based alumina with which to cover inherent pricing exposures.

All things considered, some smelter buyers have joined the producers in seeing the advantage of index-based pricing. One smelter buyer said his company was considering spot-based alumina pricing for 2012 for the first time, after the fall in LME aluminum to record lows for 2011 raised the floating price of alumina as a percentage of the LME.

The buyer was previously intending to price all of its alumina as a percentage of the LME.

Ends --

Platts analysis: www.platts.com