Metalnewsnet 5 May:

Norsk Hydro ASA might support an indexed alumina pricing system once it has a net long alumina position following its acquisition of Vale's aluminum assets, a company executive told AMM.

The possibility of introducing an alumina index for pricing the raw material would be an about-turn for Hydro, which previously said it would not support such a move.

"We have not had those discussions yet on how that will impact our view on pricing, but I think we will have those discussions," said Simon Storesund, senior vice president of Hydro Aluminium AS, a unit of Norway's Hydro. "Now that we are becoming a larger company in the alumina business and we are also becoming quite a big long player, we will have to look at what we believe is best for the industry and what we believe is best for the company."

His comments came after Hydro announced Sunday that it will buy Vale's aluminum, alumina and bauxite assets in a $4.9-billion deal, increasing the Norwegian producer's alumina capacity some 170 percent to 5.7 million tonnes per year (see story, page 4).

Previously net short in alumina, Hydro will be in a position to profit from an indexed pricing mechanism, market sources said.

"The consolidation leads into this whole concept of changing to an indexed pricing process," one alumina buyer said. "Now that Hydro will be net long, is it to their advantage to switch their tune from a net consumer on an LME basis to a spot related kind of contract? Alcoa (Inc.) and BHP (Billiton) have certainly said that it would maximize profitability for their companies."

Alcoa and BHP have been vocal about needing a new way to price alumina, arguing that pricing it off aluminum on the London Metal Exchange fails to take into account the material's own fundamentals.

"Price setting to induce investment needs to be based on its own supply and demand fundamentals and not floated off of the LME aluminum price, which is driven by its own dynamics," Jon Dudas, president of BHP Billiton's aluminum division, said in his keynote address at Metal Bulletin's 16th International Bauxite and Alumina Seminar in Miami earlier this spring.

At the same conference, Hydro—then net short—said it would not support an indexed system. "We do not believe in an indexed pricing for alumina. We're not going to stand up with BHP and Alcoa, at least not within the next few months, to go for that," Storesund told the conference. "I think that the market will evolve over time, but I think there will be a lot of resistance among customers."

At that time, Storesund said that his reluctance to buy into an indexed alumina price was prompted by the fact that the spot market is too thinly traded to maintain a unique price.

Storesund reiterated those concerns Monday. "My personal feeling (at the time of those comments) was that there was not enough liquidity or activity in the spot market to really set a good reference price. The tonnage that is reserved for shorter-term contracts has to increase; the market has to be more liquid so you can actually establish a good index," he said.

But some of those concerns have started to be addressed, with Alcoa announcing in April that it was moving toward shorter-term supply contracts (AMM, April 16).

As such, it may be time for the market to consider an indexed price, Storesund said. "I think there is less appetite in the market for fixed-price contracts," he said Monday.

BHP and Alcoa aren't the only alumina producers that have complained about fixed-price contracts. Just last week, Jamaican government sources told AMM that its decision to sell its 45-percent stake in the Jamaica Alumina Co. (Jamalco) refinery was prompted by unfavorable fixed-price alumina supply contracts with Glencore International AG (AMM, April 26).

But not everyone in the industry would support a shift to an indexed price. "(With regards to) indexing, I quite honestly don't know how this is going to work out. I can't imagine a better index than the LME," a second major alumina buyer said. "When you use 85 percent of the alumina making metal, I don't know how else you can price it except against metal. I find the other indexing open to manipulation."

Hydro's deal with Vale is not expected to close until the end of the year, so the company has some time to consider an indexed alumina price before making a decision, Storesund said.

"There will be a process now in planning the integration, and closing is not expected until the fourth quarter so I think we have to focus on closing and then look at the pricing," he said.