Price Discovery in Alumina and Aluminium | MetalshubTalks 013 Recap

Alumina is the single largest input cost for an aluminium smelter, yet the price most of the industry relies on for it rests on a remarkably small pool of trades. Aluminium, one step further down the same supply chain, has an exchange-traded futures curve that runs years out and a liquid physical premium market attached to it. Two materials, one supply chain, and two very different ways of arriving at a price.

In a recent episode of MetalshubTalks, I sat down with Abdi Salad, Base Metals Pricing Lead for aluminium at LME Insight, and Dr Sebastian Kreft, Co-Founder and Managing Director at Metalshub. We looked at where both markets stand after two volatile years, what it takes to build a physical reference price when few cargoes trade, how aluminium earned its benchmark, and what Hindalco’s move to tender alumina openly on Metalshub could mean for price discovery.

Abdi Salad: LME Insight is an independent price reporting agency. We are part of the HKEX group and are administered by Commodity Pricing and Analysis Limited. Our aim is to improve price discovery and transparency by covering the metals market in a different way.

Our methodology is transaction-led. We take deal data directly from producers, consumers and traders across the whole supply chain and use it in our assessments. For our P1020 aluminium premium, for example, if we see enough volume and enough individual deals in a pricing session, the price is a volume-weighted average of those trades. That makes us more responsive to real changes in the market and less reliant on sentiment.

So far we have launched our European duty-paid and duty-unpaid P1020 premiums. US Midwest and Asian premiums are next, and I am building out the wider aluminium suite.

Abdi Salad: It does feel counterintuitive that two markets in the same production chain trade so differently. Aluminium has had a very bullish year. Prices topped just above $3,800 per tonne after the conflict in the Middle East began, and the region lost a meaningful share of its GCC primary production because of the war. That has left the physical premium market in Rotterdam very tight.

Alumina has gone the other way. Prices have dropped steadily since the peak of around $780 per tonne in late 2024. That peak was driven by bauxite disruption in Guinea and stronger Chinese domestic demand. Since then, Chinese domestic supply has absorbed much of the pressure, and the market is now well supplied.

More recently, a refinery output cut linked to a gas supply disruption has brought alumina back into focus, so we could see prices recover a little from here. But overall, this has been a bullish year for aluminium and a bearish one for alumina.

Abdi Salad: There are some commonalities, but much of it is very different. Alumina mostly trades on a contractual basis. It is priced either as a percentage of the LME aluminium cash price or off index assessments from price reporting agencies.

Aluminium and its premium markets for P1020, billets and value-added products have a liquid spot market attached to them. They respond quickly to physical outages and supply disruptions. The way alumina is priced does not reflect those events in the same way, and there is no proper way to hedge the risk that shows up in its price reactions.

Abdi Salad: As a transaction-led PRA, deals sit at the top of our data hierarchy. What we accept into an assessment depends on whether we see trades. In a market where liquidity is as low as it sometimes is in alumina, it starts with being disciplined about what counts as evidence.

Sometimes that means accepting that you should not move your price on sentiment alone, and that you need more deal data to see where the market is heading. The tradable spot market for alumina is estimated at around 30 million tonnes a year, compared with annual production of about 140 million tonnes. You cannot rely on the deep pool of transactions you see in the P1020 or billet markets.

So we have to be explicit about the methodology. People need to know what comes into our system, how we track the market and how we follow where deals trade.

Abdi Salad: The hardest part is resisting pressure from the market, from subscribers and from the industry to publish a price that sounds more certain than the data justifies.

In a thinly traded market, it is easy to move a price on editorial judgement or on where you and everyone else think the market is. Then the next deal comes in the opposite direction. It is important to follow the data and to be explicit in your rationales about how you arrived at the number you published.

Abdi Salad: We are trying to gather more data than other PRAs. That means capturing the producer-to-trader market, the trader-to-trader market and the trader-to-consumer market, so we see the full breadth of trade.

We use the reputation and trust the LME has built over many years to formalise the data submission process, rather than surveying the market to work out where premiums sit. Our processes are IOSCO audited, and our prices are structurally independent of the LME, including from where the LME aluminium cash price sits. Having data reported directly to us in greater detail will improve our pricing process and set us apart from others.

Abdi Salad: To your first point, alumina is still sometimes priced as a percentage of the LME in long-term contracts. The market has not fully moved away from that traditional model yet. The LME aluminium market has matured in a way the alumina market has not, and several conditions had to be true for that to happen:

1. A single, standard specification. What can be delivered into an LME warehouse is P1020. That gave the exchange contract a delivery basis without constant quality disputes.
2. A critical mass of exposed participants. Producers, consumers and intermediaries were all exposed to the same price and had real hedging needs.
3. Warehouse and warrant infrastructure. Physical settlement made the paper price credible to the physical market.

I think we will see similar developments in alumina. We need to let the market develop, and tenders are one way to improve transparency and spot liquidity. But it did not happen quickly for aluminium. The LME contract started in 1978 and took many decades to mature into the market we have today. It is still early days for alumina.

Dr Sebastian Kreft: I would add one point. P1020 aluminium is fully fungible, which makes a physically settled exchange contract possible. The same is not true for alumina. Different producers make different specifications, in different sizes and in some cases with different packaging. So I do not think alumina will follow the same maturity curve towards a physically settled exchange contract.

The more likely future is cash-settled futures. What a cash-settled contract needs most is a reliable price index, and that is what all of us in the industry are working on: more transparency and more reliable pricing.

Abdi Salad: It is on a similar trajectory. The difference is that the alumina spot market today is much thinner than the aluminium spot market was when the LME aluminium cash price was developing. Much of the alumina market still settles on a percentage of the LME aluminium cash price, and many PRA numbers are also still settled that way. But the way aluminium developed shows the value of having a real hedging instrument available to consumers, producers and traders.

Dr Sebastian Kreft: There are also some similarities. P1020 carries premiums for different locations, and high-purity metal can carry a quality premium. Something similar holds for alumina. Around an alumina index, there are location premiums in different parts of the world, and premiums or discounts depending on the exact quality specification. So premiums are common to both. The two markets are at different maturity levels, though, and by the nature of the product, that will always be the case.

Dr Sebastian Kreft: We have been engaging with alumina market participants over the last two or three years, and there is a common understanding that the market needs a more liquid spot market. Alumina is a critical commodity for the aluminium industry, and the spot market is where you find out what the price is based on supply and demand.

The problem is not easy to fix. For a smelter, alumina is the key input, so security of supply comes first. Contracting less than 100% of annual demand is a risk, because without a liquid spot market you might not be able to buy the alumina you need. That is why smelters have historically been highly contracted.

At the same time, producers say they also want a more liquid spot market for price discovery. But if consumers contract so much on long-term deals, it is risky for a producer to leave volume open for the spot market. Without liquidity, they might be stuck with volume they cannot sell. It is a circular reference.

The understanding is clear, and it will not be solved quickly. Spot liquidity has to grow step by step, so that confidence grows to leave more volume open.

Abdi Salad: I think you hit the nail on the head. Another good first step is Hindalco’s decision to tender alumina openly. When I was covering the alumina market, tenders were hard to come by. They were secretive and open only to a select group of buyers. Putting them out in public gives people a better idea of where the spot price is, and that should improve spot liquidity and price discovery.

Dr Sebastian Kreft: For me, the Hindalco announcement feels a bit like 2010, when Marius Kloppers and BHP changed the way iron ore is priced. One company takes the lead and proposes something to the market to create a more liquid spot market and better price discovery. That will have an impact on the industry.

The big question is what transparency means. Not everything will be public. But I have spoken to alumina traders with significant books who told me there are tenders in the market they do not even know about. More visibility of cargoes available to the spot market, for the relevant companies, is an important first step. Next steps need to follow.

Dr Sebastian Kreft: Many factors matter in a deal besides the price: location, quality, payment terms, packaging, lead time and parcel size. It is a matrix. When a deal is concluded on Metalshub, all of this information is captured, because a legally binding contract is signed on the platform. We hold no stake in where prices go, so we are completely neutral.

Once that database exists, a price reporting agency can use it. LME Insight could take this trading data, with the confirmation of the participants, and use it in its price assessment. That would greatly improve the quality of the assessment. Today you might hear about a deal in the market without knowing all the details. Complete deal information fills that gap.

Abdi Salad: I agree. It is a very good complement to what we do. Alongside deals reported directly by producers, with the specifications broken down for us, a platform like Metalshub contributing to our pricing process will add more detail to the deals we accept and to the rationales we publish.

Abdi Salad: We accept that sustainability will be an important part of these markets for years to come. We are launching sustainability premiums alongside all our regional premiums. Our sustainability premium for P1020 in Europe is already live, and we plan to do the same for the US Midwest and Asia, and for value-added products such as slabs and primary foundry alloy when we get there.

Alumina is part of that roadmap too. We know it is a very important market to cover, and we are already collecting data for the alumina index we plan to launch. I cannot give an exact date, but it is coming very soon.

This episode made one thing clear. Aluminium’s benchmark took decades to build on a fungible product, deep hedging demand and physical infrastructure, and alumina has only some of those foundations. The gap will close through more observed trades, better data and more open tendering, one step at a time.

As Sebastian put it, a marketplace is one piece of the puzzle. Producers, consumers, traders and price reporting agencies all have a part to play. For anyone buying or selling smelter-grade alumina, three things are worth acting on now:

1. Take part in open tenders. Every cargo traded in the open adds evidence to the price and builds the spot liquidity that gives smelters and refiners the confidence to leave more volume uncontracted.
2. Capture the full deal terms. Price alone tells half the story. Location, quality, payment terms, packaging and parcel size are what turn a reported deal into usable evidence for an assessment.
3. Watch the new benchmarks. LME Insight’s upcoming alumina index and its sustainability premiums will add new reference points for contract pricing and carbon-related premiums under CBAM.