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Metal Bulletin is pleased to announce the launch of their new Alumina Index, based on loaded prices of smelter grade alumina at Australia.
This utilises the Metal Bulletin Index Methodology of a tonnage weighted calculation of actual transactions which have been normalized to a base chemistry and location. This gives an accurate and unbiased representation of the alumina spot market, and includes mechanisms to minimize unfair or unrepresentative market distortion.
The alumina market has seen significant changes in recent years, and there has been a desire to move away from a price connected to primary aluminium market, and to a free market price. A requirement for the effective pricing of physical material in contracts linked to the free market price is an independent, robust and transparent representation of the alumina market.
In addition, the emergence of an independent and auditable calculation of the alumina spot market will open the door to the Index being used in cash settled swaps and futures markets. This will bring increased flexibility and options to those available to primary aluminium producers, as well as alumina producers, as part of their risk management and price risk strategies.
“The new MB Alumina Index is a tool designed to satisfy the strict requirements of both the physical and financial markets” said Cameron Hunt, Director MB Index. “This will add to the risk management toolkit for market participants in the medium term. It is important that methodology is accurate and repeatable, and removes as much as possible the chance of market distortion, with a repeatable and auditable methodology that balances market influence.”
The Index is an accurate reflection of actual physical transactions in the important Australian market, which is used a benchmark for the region. Global production of alumina in 2010 will 80m tonnes, and is forecast to reach more than 130m tonnes in 2020, according to Metal Bulletin Research. Australia is the world’s largest producer of smelter grade alumina.
The Index is a tonnage weighted calculation, based on actual transactions, rather than assessments, opinions, offers/bids etc, although these can be included in the calculation at a minimum weighting according to fluctuations in market tonnages. The data is normalised, using an in-house developed model based on the value-in-use applied by the market to different material grades, to standard smelter grade alumina, and using the latest freight rates supplied by one of the leading brokers to a single port (Bunbury).
We have gone to considerable length and market dialogue to ensure that the index is as accurate and representative as possible. We have built in unique mechanisms which are designed to prevent market manipulation, either deliberately or inadvertently.
Three sub-indices are created, with data from the major participant groups in the market – suppliers, consumers and traders, in line with the already proven MB Index methodology. These are individually weighted on transaction tonnage, and then combined with equal weighting to ensure that one side of the market does not swing the index. This could happen through chance, with different total tonnages being reported by different sides of the market, but its main intention is to prevent cherry picking / selective reporting of trades.
In addition, any (normalised) trades that are more than 4% away from the calculated index are excluded as outliers, and the index recalculated. This gives a very tight grouping, and any outliers are looked at. Those who appear to be trying to influence the index are contacted and potentially excluded. Only the final index will be published.
For details of the methodology, click here.