Alcoa moves to alumina index price, Aviles ramps up

NEW YORK Thu Oct 7, 2010 9:14pm EDT

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NEW YORK (Reuters) - Alcoa Inc (AA.N), the largest U.S. aluminum producer, expects both its Aviles smelter in Spain and its alumina refinery in Sao Luis, Brazil to be running at full capacity by the end of the year.

Company executives also said on Thursday that the world's biggest alumina producer is changing the way it prices its alumina, an intermediate material used to produce aluminum.

"During the (third) quarter, we restarted production at Aviles and anticipate achieving full capacity by the end of this year," said Chief Financial Officer Chuck McLane, speaking to analysts on a conference call after reporting earnings.

Looking to next quarter, he said, Alcoa expects production at Aviles to increase by 25,000 tons as it ramps up.

Alcoa reported a lower third-quarter profit, but beat consensus estimates and raised its outlook for global demand.

Its revenue rose 15 percent on higher volumes in aerospace and increased market share in the building and construction market, with greatest strength coming from China, India, Russia and Brazil. (Graphic link.reuters.com/cys47p)

In June, the entire area surrounding the smelter in Aviles, Spain flooded, forcing the facility to shut down. Significant repair work allowed the smelter to begin operating in August.

In Brazil, McLane said, the Alumar alumina refinery in Sao Luis operated at an annual run rate of 2.9 million tons by quarter end and remains on track to achieve full production run rates of roughly 3.5 million tons by the end of 2010.

Chairman and Chief Executive Officer Klaus Kleinfeld added that the Juruti bauxite mine and the Sao Luis alumina refinery achieved record production levels in September.

"Even though we had to overcome failures of the ship unloader, we expect that we have a permanent solution in place by the end of this month. And in general we are on track to achieve full production by the end of this year," he said.

Alcoa's third quarter alumina production was up by 157,000 tons. Kleinfeld said increases at Sao Luis, Pinjarra and Surinam were slightly offset by a reduction at its Point Comfort, Texas refinery.

For the fourth quarter, McLane said Alcoa sees its global alumina output rising by 150,000 tons over the third quarter.

For overall global supply, Alcoa estimates a 450,000-tonne surplus from China, and a 200,000-tonne deficit from the West.

Kleinfeld also said Alcoa is in the process of changing the way it prices its alumina, away from linking to a percent of the London Metal Exchange aluminum price and using instead a basket of indexes to better reflect underlying costs.

"We have been successfully concluding contracts for our 2011 volume, using a monthly average of a basket of different published alumina prices, not favoring one over the other. I think that is much fairer than pricing that existed before."

He said the new pricing scheme better reflects the cost structure for the alumina industry, including ocean freight, oil, gas and coal compared with the traditional LME aluminum price. An alumina index price also gives more flexibility and reflects alumina's short-term volatility.

Kleinfeld said Alcoa is currently completing alumina contracts on the new pricing basis, with about 20 percent of its customer volume coming up every year.

"So, it will take awhile until this will ripple through the system. But I think the customer understands why a change like that is needed. Because frankly, alumina has very different cost drivers from aluminum," he said.

(Additional reporting by Steve James; Editing by Bernard Orr)

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