LME alumina contract provides new hedging tool for volatile market
Published: Tuesday, 12 March 2019
The new alumina contract will allow market participants to hedge against risk.
By Alice Mason
The new London Metal Exchange alumina cash-settled contract,
which was launched on Monday March 11, will provide the market
with a new hedging tool after a year of dramatic price
With Norsk Hydro’s Alunorte refinery in Brazil
still producing at just 50% capacity, the alumina market is
susceptible to more extreme volatility in the year ahead.
The LME alumina contract is settled against Fastmarkets
MB’s benchmark daily fob Australia alumina index
in a basket alongside CRU’s alumina index. Equal
weighting is given to each index.
The contract will give traders a new opportunity to hedge
their risk against price movements and to trade the alumina
"The alumina market remains unstable due to
Alunorte’s curtailment. A single deal can move the
market price by $200 per tonne at a time. People need to cover
themselves," a trader said.
In March 2018, Hydro’s Alunorte alumina refinery
declared force majeure after it was ordered by Brazilian
national authorities to reduce output by 50%. It has been
operating at 50% capacity since then, which has led to a large
reduction in the number of available alumina cargoes.
Consequently, Fastmarkets’ benchmark daily
alumina index fob Australia reached $707.75 per tonne in April,
the highest level since the index was launched in August 2010
and 75% higher than at the start of 2018.
Liquidity indicator of the Fastmarkets fob Australia
Traders had to pay record fees to secure material and
aluminium smelters ran at a loss with margins squeezed.
"It hurt because people weren’t prepared," a
consumer said. "We were exposed to the price moves, and nobody
in their wildest dreams at the start of 2018 thought that
alumina would trade at $700 per tonne."
Throughout 2018’s rally in alumina prices, the LME
aluminium price became disconnected from the market.
Instead of rallying alongside raw materials, the three-month
price remained flat, trading between $2,000 and $2,100 per
tonne. On some occasions, alumina was trading at 30% of the
outright aluminium price.
Smelters report that when the alumina price trades at more
than 19% of the aluminium price, they start to lose
"You can no longer look at the LME aluminium price for alumina.
It is its own market, and the disconnect between the two made
some people lose a lot of money," a second trader said.
"It caused a lot of trouble for smelters when they were paying
$600 per tonne for alumina, and aluminium was only selling at
$2,000 per tonne. The maths doesn’t make sense,"
Historically, the alumina market was priced as a percentage of
the outright aluminium price on the LME, but physical contracts
have since changed to being based on price-reporting agency
Some companies, however, remain bound to long-term LME-based
contracts, which have caused them to lose money.
Rio Tinto’s most recent earnings report from
February 17 said it has legacy contracts which are fixed to the
LME price until 2030, which had a negative effect on its
"We are exposed to approximately 2.2 million tonnes of legacy
alumina sales contracts which have a fixed linkage to the LME
price. These contracts date back to 2005 or earlier, and the
majority expire between 2023 and 2030," Rio Tinto said.
"The negative effect on Ebitda [earnings before interest,
taxes, depreciation and amortization] of these legacy
contracts, following significant escalation in the alumina
index due to industry supply disruptions, was $460 million in
2018. This was $300 million higher than in 2017," it
A further escalation in the alumina index is not unlikely,
with the timeline for Alunorte’s return still
uncertain. The majority of the alumina market remains
"Everyone remains on edge. One announcement can change
everything in either direction. There is a lot at stake," a
third trader said.
The new LME contract will also mean that traders can hedge
themselves against downside risk should Alunorte’s
return send alumina prices plummeting.
September 2018 showed how quickly the alumina market can
change. The fob Australia index hit a high of $652.92 per tonne
on September 17 before dropping by 28% to a low of $468.40 per
tonne on October 1, due to a number of cargoes trading
Price change percentage in the Fastmarkets fob
The end of a workers’ strike at aluminium
producer Alcoa’s operations in Western Australia
and the extension of the US deadline on sanctions against
Russian producer Rusal, which helped to push the index higher
alongside the Alunorte issues, added to the bearish
"The reality is that we could wake up tomorrow morning to a
Hydro press release that says 'Alunorte is back at full
capacity’ and things will fall off a cliff," a
fourth trader said.
The index was assessed at $391.38 per tonne on Friday March 8,
with the most recent 30,000-tonne tender from Nalco concluding
at $390 per tonne.
The year 2018 showed how quickly a market can change, due to
sanctions, strikes or force majeures, and showed the need for
further hedging tools.
"Last year was a learning curve for a lot of people," the first
trader said. "But now we have to be a bit more sensible, and
look at the bigger picture, because one little thing can turn
the market on its head."
You can see the LME alumina contract specifications
Fastmarkets will host a free webinar with the LME on March 18
to introduce the new Fastmarkets-settled alumina and European
duty-unpaid aluminium contracts.
You can register for this webinar here.