BHP transforming alumina pricing: market clearing prices

ALUMINA is on track to follow iron ore and coal in a new pricing system to reflect market clearing prices on shorter-term contracts.

The industry is falling in behind BHP Billiton, which has led the push for changes in iron ore and coal and is now charging ahead with a bid to de-link the price of alumina from London Metals Exchange-priced aluminium.

Credit Suisse research analysts, led by Paul McTaggart, said alumina would break free from linkage rates in the next year. “Spot pricing has delivered bonanzas for the bulks and we believe alumina needs a stronger price to bring on necessary supplies, so we expect spot prices to rise,” the analysts said in a commodities report.

Mr McTaggart expects to see an alumina index come into existence, which would track spot price sales.

The move in alumina would follow BHP's push to kill the 40-year-old annual benchmark iron ore system in favour of quarterly contracts linked to index-based pricing -- a move the miner has also made for its coal contracts.

Pricing of alumina is set as a percentage of the aluminium price, a system that has been used for 30 years.

But the development of the Chinese alumina industry, which has been built independently of the aluminium smelters in China, has seen the economic powerhouse sell alumina on a daily basis on the spot market.

“China tends to be the price-setter for many commodities, and what we need to see is a global system that reflects the fundamentals of the industry, the cost structure and the supply and demand,” said Alumina Ltd chief executive John Bevan.

“The pricing that links it to aluminium, which is a completely different product, does not reflect the fundamentals of alumina supply and demand. It is the move away from the linkage component, which is most pronounced in China, that is the biggest issue facing the global alumina industry.”

Mr Bevan said the need for pricing change had been talked about in the market for a long time but it was the evolution of the Chinese market and the turbulence in the sector created by the global financial crisis that had aided the momentum for pricing change.

BHP Billiton's president of aluminium, Jon Dundas, told an industry seminar recently the alumina price does not reflect supply and demand.

He said a number of long-term supply agreements end this year, so alumina producers should begin index discussions with their customers.

Russian oligarch Oleg Deripaska, chief executive of aluminium giant United Rusal, has backed BHP's push, as has Alcoa CEO Klaus Kleinfeld.