BAUXITE & ALUMINA CONF: New alumina contract will address volatility, Al price disconnect, LME says

The new London Metal Exchange cash-settled alumina contract will help the exchange to retain its top spot as the global reference for the aluminium industry, according to LME business development analyst Antonio Masiero.

Speaking at the Fastmarkets Bauxite & Alumina Conference in Miami on Wednesday March 27, Masiero said that, while the market moves away from pricing alumina as a percentage of the LME price for aluminium, the new contract will help it to continue to provide options throughout the supply chain.

The new contract was launched on March 11 and is settled against Fastmarkets’ benchmark daily fob Australia alumina index, in a basket alongside price assessor CRU’s alumina index. Equal weighting is given to each index.

You can see the LME alumina contract specifications here.

“The LME is the reference globally for the aluminium industry, and we want to remain as such,” Masiero said. “We know that the alumina market has been moving away from the aluminium reference point, so we want to provide the right hedging options.”

Historically, the alumina market was priced as a percentage of the outright price of aluminium on the LME, but physical contracts have changed to being based on indices calculated by a price-reporting agency (PRA).

Some companies, however, remain bound to long-term LME-based contracts, which has resulted in them losing money.

Rio Tinto’s most recent earnings report, published on February 17, said that it has legacy contracts which are fixed to the LME price until 2030, and these had a negative effect on its corporate results.

“Since 2010, a number of factors have pushed the industry away from pricing on a percentage of the LME price, including the increased cost of caustic soda and the changing dynamics of the LME and the alumina market,” Masiero said.

“This has caused participants to move toward PRAs. It is a cycle – more participants report to PRAs, such as Fastmarkets, and therefore the price gets better and more reflective, giving them more reason to move away from pricing on aluminium prices,” he added.

This move meant that the market could not hedge it alumina exposure through LME aluminium contracts any more, Masiero explained.

The market was exposed to the huge volatility in the industry. In 2018, for example, the sector endured one of its most volatile years, with sanctions being applied to Russian aluminium producer UC Rusal by the United States, force majeure being declared by Norsk Hydro’s Alunorte mine in Brazil, and workers’ strikes at Alcoa-run assets in Western Australia.

At its height last year, the Fastmarkets fob Australia alumina index hit a record high of $707.75 per tonne on April 24. It was most recently at $413.23 per tonne on March 27.

Throughout 2018’s rally in alumina prices, the LME aluminium price became disconnected from the market.

Instead of rising in line with the raw materials, the three-month price of aluminium remained flat, between $2,000 and $2,100 per tonne. On some occasions, alumina was trading at 30% of the outright aluminium price.

“So, we obviously need to address that volatility, and we have launched a contract,” Masiero said.

“The underlying price is settled in a basket of Fastmarkets and CRU [assessments], with 50% weighting, and is settled monthly using the average of the PRA prices,” he added. “We developed the price on the basis of feedback from the market.”

The LME said there have been multiple bids and offers seen through the LME Select platform.

“It is a long process and we have only just begun, but we have confidence in the product,” Masiero said.

“We saw with aluminium, which is by far our most traded contract, that it takes time to build liquidity,” he concluded. “It is a long process but we are providing all the right options. Everyone knows how in touch we are with the aluminium industry.”