COMMENT: Emerging merchant market a precursor to shift in bauxite pricing structures

As alumina refineries start to show greater flexibility in their raw material intakes, the stage has been set for a merchant bauxite market, heightening the requirement for a spot-linked reference price and the transparency it provides.

Concord Resources is the first merchant to have taken the step: under an exclusive long-term offtake agreement, it will market the bauxite produced by Noranda at St Ann in Jamaica. Of the 5 million tonnes of bauxite produced by the mine, 2.3 million tonnes is absorbed by Noranda’s Gramercy alumina refinery in the US state of Louisiana, leaving 2.7 million tonnes open to be marketed.

“There is increasing awareness of different origins; refineries used to always have integrated supply channels and they can now investigate diversifying, which makes for a more interesting market,” Concord ceo Mark Hansen told Metal Bulletin.

Chinese market participants are increasingly looking to the seaborne market as the quality of domestic ores continues to slide, while other supplies from other origins, such as Indonesia or Malaysia, have proved inconsistent.

For the merchant, offtakes give the chance to take a share of this growing seaborne bauxite market. Demand, primarily from China, has been estimated to reach nearly 130 million tpy by 2026, growing at an average rate of 8% a year.

Distance from China need not necessarily be a concern. Alcoa has secured third-party sales to China from its Brazil mine, the company’s ceo said last year.

In addition, Concord could be primed in the instance of a recovery to the US aluminium sector. At such a time, it may find itself in an ideal position to provide price-competitive bauxite units to the US markets.

For the miner, an offtake lets them lock in a sales avenue for their material – a route that will look appealing to some of West Africa’s junior miners.

Developers are primed to get their operations off the ground, particularly in Guinea, and merchant partnerships can cut a producer’s risk profile as the marketing partner takes on the burden of providing financing or credit that the producer may not wish or be able to take on.

Developing market maturity
The emergence of a trader market is reminiscent of a shift that took place in the alumina market almost 30 years ago, market participants have noted.

In the late 1980s and early 1990s when traders came to the alumina market, it prompted the move from long-term pricing to contracts linked to the aluminium price on the London Metal Exchange.

Since then, the market has shifted again, with alumina contracts increasingly linked to independently-published indices. These are tied to the spot alumina market which acts according to its own supply-demand fundamentals.

Long-term, producer-led pricing has remained the norm in the relatively less mature bauxite market. Other pricing mechanisms, such as a link to alumina indices or the LME aluminium contract, have struggled to gain traction as bauxite grade and quality varies from mine-to-mine.

Market participants can also take heed from the alumina market, where prices have acted independently of downstream metal prices.

What has held the bauxite market back until now is the lack of spot market business and the perceived lack of fungibility of the raw material, compared with smelter-grade alumina and its fairly uniform specifications.

But a shift in pricing structure is inevitable, and that shift looks closer in light of Concord’s entry in to the bauxite market.

Metal Bulletin’s recently-launched bauxite price assessments are based on tight chemical specifications, derived from analysis of the most commonly-traded spot volumes sold out of Brazil and Guinea.

Prices assessments like these can mature into price indices – more complex tonnage-weighted, value-in-use calculations, fed by a wide variety of brands, grades and origins.

Independently-calculated price indices are intrinsically tied to the market by taking spot transactions into account. But for the most chemically-complex markets the required level of spot liquidity is characteristic of more mature markets, such as iron ore.

Merchant offtakes, such as Concord’s, look set to make a significant contribution to the increase in liquidity this evolution requires.

“There has been a breakdown of the typical integrated system. You need to be a bit more creative with your intake,” a market participant said.

The advent of the merchant market is also likely to provide a receptive audience, seeking the market tie provided by an index.

“Traders and non-integrated parties aren’t going to use producer pricing; they won’t be tied to a flat price. They want something more market focused,” one producer source told Metal Bulletin.