Alumina is a key input in aluminum’s production process. It can take almost two pounds of alumina to produce one pound of aluminum. Alumina doesn’t have a very liquid market, and that makes pricing it difficult. Aluminum, on the other hand, is the most widely traded metal on the London Metal Exchange (or LME). As a result, most alumina producers used to price alumina at a percentage of aluminum prices. However, over the last couple of years, several aluminum companies have been gradually moving away to the alumina price index (or API).
Alumina prices fall steeply
The API has fallen steeply over the last couple of months as you can see in the graph above. According to the Metal Bulletin, the API was quoted in the $200 per metric ton range in December 2015, or $100 lower over August. Alumina prices fell 33% since August and almost 45% in 2015.
Alumina prices could remain weak in 2016. As aluminum prices continue to trade weak, alumina prices could be negatively affected as well. It’s important to note that alumina prices through API are less dependent on aluminum prices. This helps in independent price discovery of alumina.
Nonetheless, alumina prices can’t be totally independent of aluminum prices. This is similar to the steel industry, where iron ore and steel prices have a close correlation with each other.
Companies that have captive alumina capacity and also sell alumina to third parties would be negatively impacted by lower alumina prices. Alcoa (AA), Rio Tinto (RIO), and Norsk Hydro (NHYDY) would be negatively impacted by lower alumina prices in 2016. However, as Century Aluminum (CENX) sources alumina entirely from third parties, it stands to benefit from the steep fall in alumina prices. Currently, CENX forms 1.5% of the Guggenheim S&P SmallCap 600 PureValue ETF (RZV).
In the next part, we’ll explore how aluminum premiums could play out in 2016.