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Growing Competition for Natural Resources Leads to Daily Pricing for Alumina

By Dave Forest | Mon, 18 October 2010 13:42 | 0

We've all heard the lines about increasing global competition for natural resources.

The world is not the same as it was ten or even five years ago. New sources of demand have emerged for oil, iron, copper and natural gas. And competition for all of these resources has become fiercer.

This isn't just talk. Watching the news, you can see the signs of "elbows out" resource markets all over the globe.

Case in point. This week, metals data provider Platts announced it will start publishing the world's first daily alumina price.

Traditionally, alumina (the ore that smelters use to make finished aluminum) has been priced indirectly. The industry simply used a percentage of the world price for finished aluminum. This was seen as an acceptable proxy for alumina demand.

But demand for the input commodity can be different than demand for the end metal. If smelters foresee a pick up in aluminum demand, they might start aggressively buying alumina in order to start turning out new product. In such case, alumina demand (and therefore price) might be going up even as aluminum metal prices stay relatively calm.

In the past, this wasn't a big deal. Alumina producers sold supply under long-term contracts to several buyers globally. The market was fairly orderly.

But with aluminum smelting capacity picking up in places like China, things are getting more complex. With more users (and more geographically diverse users), the global demand profile can change quickly.

Alumina producers (not to mention investors and traders) want to know about these changes. If a buyer in Shanghai is ramping up output and willing to pay more than a European smelter, producers want to shift supply to this higher-value market.

In order to make such adjustments, you need to be able to see emerging sources of demand. A daily price helps detect such.

Welcome to the competitive resource marketplace. It's more complicated and dynamic. Things change quickly, and everyone wants to be able to adjust in near real-time.
Long-term contracts are being shunned for spot pricing. Meaning that assured supply is getting harder to find.

This is one of the reasons we're seeing end-users of many commodities get aggressive in purchasing direct interests in mines and oil fields. If you can't secure supply contractually, you need to own the supplier.

By. Dave Forest of Notela Resources

About the author

Contributor
Dave Forest
Company: Pierce Points Daily E-Letter

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