2017 PREVIEW: Alumina contracts could move to benchmark settlement as LME price divergence continues

With benchmark alumina prices ending 2016 close to two-year highs and continuing to diverge from the LME aluminium price that contracts have traditionally been fixed to, more 2017 contracts could be linked to benchmark indices, market players have suggested.

Benchmark fob Australia alumina prices, used as a reference by much of the industry, stood at $349.69 per tonne on Thursday December 22, according to Metal Bulletin’s index, compared with $236.68 per tonne at the beginning of October. 
Prices experienced a steep rally in the fourth quarter after a wave of smelter restocking in China. But negotiations for 2017 alumina contracts have reached a standstill or have been delayed with prices for the raw material now up 48% since October.
First tenders for 2017 alumina contracts were concluded at 15-16.5% of the aluminium price on the London Metal Exchange in late October and early November, market participants told Metal Bulletin.
But in light of swift and consistent price gains over the course of the fourth quarter, sellers are now asking for 17-19% of the LME aluminium price in negotiations for 2017 negotiations. Such levels have not yet been found acceptable by buyers, meaning negotiations have stalled.
“People are leaving some of their 2017 needs open,” a consumer told Metal Bulletin.
“There is some reluctance. Buyers don’t want to commit right now and are taking a wait and see approach,” a producer added.
Alumina prices have risen steadily since late September this year due to smelter restocking in China where prices for domestic material have also risen steeply, due to strong demand, environmental closures and restricted transportation availability.
But alumina and aluminium prices have continued to diverge over the course of 2016, leaving some reluctant to lock in their raw material costs against the LME aluminium price.
The alumina market has proved independent of the aluminium market over the course of the year.
A tighter alumina market supported a 25% increase in prices in the first quarter as refinery closures came into effect in China and the Atlantic market.
A closed arbitrage window slowed trade with China over the summer, with prices holding around $230 in August and September, while downstream aluminium prices continued to fluctuate.
At the time of writing, spot alumina cargoes were trading at around 20.3% of the LME aluminium price - the highest level since Metal Bulletin launched the index in 2010. The figure compares with 13.18% at the beginning of the year, and 13.83% as recently as August.
“Buyers are taking a step back, and looking back over the past year,” a trader said.
“Alumina prices will have to come down. At 19% [of the LME aluminium price] smelters have to be losing money,” the consumer added.
Buyers are reportedly reluctant to lock in contracts at more than 17% of the LME aluminium price, given the expectation raw material costs will continue react to their own market fundamentals next year.
As a result, market participants have suggested greater 2017 volumes will be linked to benchmark indices, or settled on a spot basis, rather than exposing their raw material needs to the rigidity provided by LME-linked contracts.
“It’s difficult to gauge exactly what has been committed on long-term contracts, but it looks like there might be a bit more spot availability next year – maybe one to two cargoes a week,” the consumer added
Others are looking to integrate their operations, either by investing in upstream assets, or by purchasing bauxite for internal conversion to alumina.
“If I can get a good price for bauxite, it reduces my exposure to alumina prices,” the consumer said.

Charlotte Radford



Charlotte Radford

December 27, 2016

05:00 GMT