Century Aluminum’s shift in alumina pricing
In the previous part of this series, we saw how Century Aluminum (CENX) is moving towards market-based electricity prices for its plants. We have also seen the financial benefit of this strategy. Alumina accounts for a large chunk of the raw material costs of CENX. Let’s first look at the current alumina pricing mechanism that CENX follows.
Century Aluminum sources alumina on LME-based prices
Alumina does not have a very liquid market, which makes pricing alumina difficult. Aluminum, on the other hand, is the most widely traded metal on the London Metal Exchange (or LME). As a result, alumina producers price their products at a percentage of aluminum prices. Currently, Century Aluminum is also buying alumina at LME-based prices. Aluminum prices have risen this year. This has increased the raw material costs for CENX. The above chart illustrates this rise in aluminum prices.
Century Aluminum might move to API
During the 3Q conference call, Century Aluminum indicated that it might move to the alumina price index (or API) pricing mechanism for some of its alumina purchases. Alumina prices through API are not dependent on aluminum prices. Interestingly, alumina prices based on API have not risen in the same proportion to aluminum prices.
Under the current scenario, API-based pricing can bring down the per unit production costs for CENX. This can add to CENX profits, and will be positive for CENX investors.
Please note that by moving away from LME-based pricing, CENX will lose a natural hedge for its raw material costs. By buying alumina as a percentage of aluminum prices, CENX has a linkage between its raw material costs and its final selling price of its products. This creates a natural hedge. In case of a drop in aluminum prices, the input costs will also come down.
Another shift that CENX is contemplating relates to its sales methodology. In the next part, we’ll discuss how this shift will benefit investors.