Alcoa CEO: Alumina Pricing Needs To Match Costs

BOSTON, June 17 -- The way alumina contracts are priced should be changed to reflect the difference in cost drivers between the raw material and the metal it produces, the chief executive of US producer Alcoa has said.

"The principle question is what is driving alumina costs - oil and gas, caustic, shipping and logistics, for the bauxite particularly," Klaus Kleinfeld told Dow Jones Newswires.

"The cost drivers for alumina are substantially different to those that you see for smelting. It's very odd to have those two things bundled given that they are very different cost drivers."

The cost of alumina, refined to make aluminum, is fixed as a percentage of the price of the metal. Historically this was between 11 per cent and 14 per cent, although for 2010 contracts were priced at 14 per cent to 15 per cent. With aluminum trading at $US2000 a tonne, that means alumina costs $US280/tonne to $US300/tone, below spot market prices.

However, there has been pressure to close the gap between the spot and the contract markets for alumina, just as there has been for iron ore. One suggestion is to replace the current system with an index based on spot transactions, similar to the new pricing system for iron ore.

The changes won't happen overnight.

"This is a slow process that started a while ago - contracts typically are not long term any more, and even if they are tied to LME, they have a higher percentage of LME (than the 11 per cent - 14 per cent norm)," Mr Kleinfeld said.

"We're talking about looking at something (the alumina pricing system) that historically has evolved and today you have to ask yourself, why could this system be sustained for such a long time?"

Alcoa is a joint venture partner in Alcoa World Alumina & Chemicals, with Australian-listed Alumina.

The changes have been backed in principle by other producers like BHP Billiton, but critics say they would take smelters away from a pricing structure that is a natural price hedge for metal production, boosting costs and crimping margins in the process.