Alumina Seeks New Pricing Model as Spot Market Grows (Update1)

MELBOURNE, May 5 -- Alumina Ltd., partner in the world's biggest producer of the material used to make aluminum, said there should be a new pricing mechanism for alumina to reflect the growing spot market.

"Alumina pricing should increasingly reflect industry supply demand conditions and marginal producers' costs," Chief Executive Officer John Bevan said in a presentation sent to the Australian stock exchange. Traditional pricing linked to aluminum prices on the London Metal Exchange doesn't reflect the cost of producing alumina, he said.

United Co. Rusal, the world's largest aluminum producer, last month said it supported plans by BHP Billiton Ltd. to sell alumina at rates set by the market. BHP, the biggest mining company, is building on its success this year in forcing Asian steelmakers to ditch a 40-year-old system of setting iron ore prices in annual talks.

"Structural change in the alumina market, driven by developments in the Chinese industry, will increase the volume and importance of the spot market," Bevan said.

Aluminum prices have declined 3 percent this year to $2,163 a metric ton. Spot prices are usually set at a significant premium to contract prices, Bevan said. Spot prices, according to Metal Bulletin, have gained 56 percent in the past year.

Prices Decline

Typically, alumina prices are set at fixed percentage of aluminum prices. For 2010 contracts, alumina prices were set at about 15 percent of aluminum, Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said on an analyst conference call on April 12.

Developments in the alumina industry will lead to a pricing system based on spot market prices as they did with coal and iron ore, Jon Dudas, president of aluminum for Melbourne-based BHP, said March 30.

Alcoa, the largest U.S. aluminum producer, is also seeking to change the way alumina is priced, from contract negotiations to a system with an index based on spot transactions, the Financial Times reported April 16.

Alumina shares declined 4.3 percent in Sydney trading to A$1.45 at 10:19 a.m. Alcoa fell 4.3 percent in the U.S. yesterday.

Melbourne-based Alumina owns 40 percent of the Alcoa World Alumina & Chemical venture and Alcoa the balance. The venture produces one quarter of the world's alumina, which is refined into aluminum.