Here are the answers to key questions raised during Metal Bulletin’s recent web seminar, covering price moves and trends in the bauxite and alumina markets.
What proportion of the spot market do you capture for the alumina index?
Looking back at our data history, we can estimate that around 8-10% of the global market is incorporated into our Brazilian and Australian alumina indices. Our own research suggests that not more than 10% of global alumina volumes are left open to spot negotiations each year. Although a much larger percentage of trades are concluded on an index-linked basis, these are not eligible for inclusion in the index calculation, which is purely linked to the spot market.
Will you increase the frequency of your alumina index?
The frequency of our price publications is designed to be reflective of the spot liquidity of a given market. The fob Australia price is published weekly on a Thursday while the adjustment for the relatively less liquid fob Brazil market is published fortnightly. This means, as per our index methodology, we are less dependent on non-transaction data. Transaction volumes feeding into the fob Australia index have been good so far this year, which makes for a robust calculation. On the other hand, if a market is moving quickly, with a lot of transaction data available to us to support a move, there are times when a more frequent price would make us more responsive to price moves. If we observe a sustained increase in spot transactions to justify a change to a more frequent publication, be it twice-weekly or even daily, we would be keen to do so and would publish a market consultation accordingly.
Do you think you risk leading the market rather than reflecting it by including non-transaction data in the alumina index?
Our methodology means the final price we publish is tied to transaction data where possible. There are times, however, when liquidity is thin but it is clear the market has moved. Our aim is to provide a representative price for a given week; bids, offers and assessments are used to provide clarity on where business could realistically have been concluded. The outlier filter helps to ensure this non-transaction data is a reasonable indication of spot activity; it is also given lower weighting so as to have less impact of the final index calculation.
How do your capture the buy-side of the alumina market, particularly China's purchasing activity?
The bulk of data from Chinese buyers is obtained by our analyst in Shanghai, Susan Zou, who also assesses our domestic Chinese alumina reference price. Buy-side and sell-side data is obtained from the office in London.
How widely adopted is the Metal Bulletin alumina index compared with other reference prices?
The fob Australia alumina index is widely used in contracts, either by itself or in a basket with other reference prices. It is also the basis for settlement of one of the CME's alumina futures. The fob Brazil adjustment is a relatively recent addition to our suite of prices but it has been well received and is used in contract negotiations.
How do you decide who can submit data for the alumina index and bauxite prices?
We welcome participation in price discovery from anybody active in the buying and selling of bauxite and/or alumina. In accordance with IOSCO principles, price reporters endeavour to gain an understanding of the reporting party's presence in these markets before sharing information.
How many people do you hope to have contributing to the bauxite price assessments?
We started our research into the feasibility of a bauxite reference price internally; we only recently opened the discussion to the wider market. Once we have completed our consultation period and officially launched these assessments in April, we will be able to provide an update on the number of contributors.
China is the largest consumer of bauxite and its imports are expected to increase; how will you capture this market with your proposed price assessments? Why not launch a cif China price?
For now we are netting back cif China prices for inclusion in the fob Brazil and Guinea assessments, where appropriate. A cif China reference poses challenges at present in terms of incorporating the wide range in quality of bauxite imported by China. Over time, it may be possible to provide coefficients for different brands against a base specification but this requires sufficient price history. A cif China price certainly isn't put off the table. We plan to evolve the bauxite reference prices, including a move to index methodology, as the market develops
Will you incorporate spot sales from other origins in your bauxite price assessments?
Although only Guinean and Brazilian volumes are included in the final price assessments for now, all data collected is being stored in our internal database so that we can refer back to it at a later date. For example, we have received transaction data for spot transactions out of Sierra Leone; we're keeping a secure log of information like this with the view that we may be able to establish a typical price relationship with Guinean bauxite as we move forward. That is to say: we hope to be able to normalise other origins to our base specification.
We want to be clear and open about the fact we see these prices evolving and we want to include as much of the spot volume as possible because that's what makes for the most robust reference price. But we'll only do so when we can reliably normalise other data to our base specification.
The Guinea and Brazil prices are a great way to get the ball rolling on this project and start providing some transparency to the bauxite market.
The fob Australia-basis price is the go-to for the alumina industry; do you think one reference price for bauxite will emerge in the same way?
The bauxite market is relatively less mature than the alumina market so it's quite early to say so definitively; however, we've done a lot of research in house before making our proposal public, and the consensus has been it is possible that one price could emerge as a primary reference point. The exact specification is less clear: earlier this month at our Bauxite & Alumina conference there were suggestions of a cif China price, basis Guinea-origin bauxite. It's widely known that Guinean exports are gaining momentum; we have received a lot of support for our proposed fob Guinea or a broader fob Atlantic price whereby prices for different origins are normalised to a base specification. In terms of capturing the most liquidity, a cif China price stands out but it will require good data history for us to normalise different brands and origins and to provide a useful reference price to all sides of the market.
Metal Bulletin hosted a free web seminar discussing the bauxite and alumina markets on Tuesday March 28. Click here
to listen to the recording.
Metal Bulletin is consulting on its plans to launch regional reference prices for the bauxite market. To contribute to the discussion, please click here