FOCUS: Chinalco Is Anomaly In Global Push To Change Alumina Pricing-Shanghai Metals Market

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FOCUS: Chinalco Is Anomaly In Global Push To Change Alumina Pricing

Industry News 03:15:51PM Jun 03, 2010 Source:SMM

BEIJING, June 3 -- Aluminum Corp. of China's support for the existing benchmark alumina pricing system not only puts it at odds with its global industry peers, but also illustrates how it stands out in the swiftly changing landscape of Chinese aluminum production.

Echoing developments in the iron ore sector, industry majors led by Anglo-Australian miner BHP Billiton Ltd. (BHP) have been calling to end the 30-year-old benchmark in favor of a system that better reflects the spot market for alumina, an intermediate material used to make aluminum.

Moving to the new system is likely to raise contract prices, which benefits alumina producers.

But the Chinese metals titan, also called Chinalco, told Dow Jones Newswires Tuesday that it has no issue with the current benchmark format.

Chinalco's listed unit, Aluminum Corp. of China Ltd. (ACH) or Chalco, is the third largest alumina producer in the world.

It's breaking step with global peers in the $25 billion industry, including Russia's UC Rusal, Australia's Alumina Ltd. (AWC) and the U.S.'s Alcoa Inc. (AA), because most of Chalco's alumina output goes back to the company for aluminum production.

In industry terminology, Chalco is called an integrated producer. For such a company, lower prices for one product don't matter because most of it goes into another, more lucrative product.

But Chinalco is increasingly an anomaly even in its own backyard, where swiftly growing numbers of non-integrated Chinese aluminum producers have driven up alumina spot prices in an aluminum-manufacturing binge.

As China Grows, BHP Says System Must Change

Like iron ore, the global alumina market has seen a sharp rise in demand in recent years, the development of a spot market, and a persistent divergence between spot and contract prices.

For decades, bulk purchases of alumina on one- or multi-year contracts were priced as a percentage of the London Metal Exchange's aluminum price, which stood in recent years at 12%-15%.

Now, BHP says, the system must change.

"The LME price link (was) developed in the 1980s when growth rates were sluggish and the industry was in oversupply," said Jon Dudas, BHP's president for aluminum. "The alumina industry has now reached a significant level of materiality."

But the commodities boom and China's wealth changed aluminum's fortunes, and along with it Chinalco's role.

"Back in 2005, 2006, Chinalco was very different," said Michael Huang, analyst with Beijing's state-owned Antaike metals research house. "They used to sell 70% of their alumina and only keep 30% for their own aluminum output."

Now, Huang said, Chalco keeps 80%-90% of its 10-million-ton alumina output, and only sells about 10%-20% of it.

In the last five years, large numbers of non-integrated aluminum producers also sprang up. They now account for 60% of China's alumina market, eclipsing integrated producers like Chinalco.

Aluminum producers, like iron-ore customers, generally oppose a spot-linked system since it typically means less certainty and smaller discounts.

Term prices currently lag spot prices by about $25 a metric ton.

With global economic uncertainty now hanging over commodity prices, Chinalco and those who support the existing system may have found a temporary reprieve.

But many say change is inevitable.

"Chalco would be fighting to keep the linked pricing system to protect their margins, but it does seem like they are at the mercy of the third-party market," meaning non-integrated buyers, said Robert Foot, investment adviser with FSS Advisory Equities Broking.

"Perhaps this will drive mergers and acquisitions, as we have seen with coal and iron ore consumers, to hedge against the prospect of rising prices."


 
 

Key Words:  alumina  Aluminum Al  CHALCO 

FOCUS: Chinalco Is Anomaly In Global Push To Change Alumina Pricing

Industry News 03:15:51PM Jun 03, 2010 Source:SMM

BEIJING, June 3 -- Aluminum Corp. of China's support for the existing benchmark alumina pricing system not only puts it at odds with its global industry peers, but also illustrates how it stands out in the swiftly changing landscape of Chinese aluminum production.

Echoing developments in the iron ore sector, industry majors led by Anglo-Australian miner BHP Billiton Ltd. (BHP) have been calling to end the 30-year-old benchmark in favor of a system that better reflects the spot market for alumina, an intermediate material used to make aluminum.

Moving to the new system is likely to raise contract prices, which benefits alumina producers.

But the Chinese metals titan, also called Chinalco, told Dow Jones Newswires Tuesday that it has no issue with the current benchmark format.

Chinalco's listed unit, Aluminum Corp. of China Ltd. (ACH) or Chalco, is the third largest alumina producer in the world.

It's breaking step with global peers in the $25 billion industry, including Russia's UC Rusal, Australia's Alumina Ltd. (AWC) and the U.S.'s Alcoa Inc. (AA), because most of Chalco's alumina output goes back to the company for aluminum production.

In industry terminology, Chalco is called an integrated producer. For such a company, lower prices for one product don't matter because most of it goes into another, more lucrative product.

But Chinalco is increasingly an anomaly even in its own backyard, where swiftly growing numbers of non-integrated Chinese aluminum producers have driven up alumina spot prices in an aluminum-manufacturing binge.

As China Grows, BHP Says System Must Change

Like iron ore, the global alumina market has seen a sharp rise in demand in recent years, the development of a spot market, and a persistent divergence between spot and contract prices.

For decades, bulk purchases of alumina on one- or multi-year contracts were priced as a percentage of the London Metal Exchange's aluminum price, which stood in recent years at 12%-15%.

Now, BHP says, the system must change.

"The LME price link (was) developed in the 1980s when growth rates were sluggish and the industry was in oversupply," said Jon Dudas, BHP's president for aluminum. "The alumina industry has now reached a significant level of materiality."

But the commodities boom and China's wealth changed aluminum's fortunes, and along with it Chinalco's role.

"Back in 2005, 2006, Chinalco was very different," said Michael Huang, analyst with Beijing's state-owned Antaike metals research house. "They used to sell 70% of their alumina and only keep 30% for their own aluminum output."

Now, Huang said, Chalco keeps 80%-90% of its 10-million-ton alumina output, and only sells about 10%-20% of it.

In the last five years, large numbers of non-integrated aluminum producers also sprang up. They now account for 60% of China's alumina market, eclipsing integrated producers like Chinalco.

Aluminum producers, like iron-ore customers, generally oppose a spot-linked system since it typically means less certainty and smaller discounts.

Term prices currently lag spot prices by about $25 a metric ton.

With global economic uncertainty now hanging over commodity prices, Chinalco and those who support the existing system may have found a temporary reprieve.

But many say change is inevitable.

"Chalco would be fighting to keep the linked pricing system to protect their margins, but it does seem like they are at the mercy of the third-party market," meaning non-integrated buyers, said Robert Foot, investment adviser with FSS Advisory Equities Broking.

"Perhaps this will drive mergers and acquisitions, as we have seen with coal and iron ore consumers, to hedge against the prospect of rising prices."


 
 

Key Words:  alumina  Aluminum Al  CHALCO