UPDATE: Aluminum Producers Push For Shift In Alumina Pricing

Manama, BAHRAIN, Sep 21, 2010 (Dow Jones Commodities News via Comtex) --Alumina producers are continuing to push for a move in the way contracts are priced, favoring a switch to an index-based system, they told a conference in Bahrain Tuesday.

The world's largest producers U.S.-based Alcoa Inc (AA) and Russia's UC Rusal (0486.HK) are strong proponents of a move to what they described as a system that reflects the cost of production.

"Pricing alumina relative to the London Metal Exchange is a link that we find less functional" than pricing based on costs, said John Thuestad, group president of Alcoa Global Primary Products.

These costs include caustic, energy and transportation, he noted. Alcoa is the world's largest third party seller of alumina.

Alumina is the key ingredient used to make aluminum, the metal used in the automotive and construction industries. Currently, alumina contracts are priced as a percentage of the LME aluminum price, usually between 11% and 14%.

"We support a move to a new mechanism because alumina isn't based on the cost of production right now," said Rusal's first deputy chief executive Vladislav Soloviev.

A move to an index-based system was recently seen in the iron ore sector after strong backing from key suppliers to China's stainless sector, BHP Billiton PLC (BHP) and Rio Tinto PLC (RTP).

Rio Tinto's aluminum subsidiary is also backing the concept of a switch.

"We're an integrated producer, with a balanced to long alumina book," said Rio Tinto Alcan's senior vice president of commercial, energy and carbon products, Rhodri Harries. "If we move to an index, it will take some time to play out as pricing shifts. There will probably be a range of different mechanisms, which will reflect the cost of production," he told the Metal Bulletin aluminum conference in Bahrain.

Not all aluminum producers are happy at the idea of delinking alumina contracts from the price of aluminum metal, especially if they are net buyers of the key raw material.

"As a net buyer, we want to keep the current alumina pricing mechanism as this ensures fair distribution of value-added and gives value creation along the chain," said the chief executive of Aluminium Bahrain, Laurent Schmitt. "This is the best solution to support the growth of this industry," he added.