* Alcoa contracts link price to basket of indexes
* LME price seen unreflective of refining fundamentals
* 2010 demand growth seen up 13 pct from pvs year
By Carole Vaporean
NEW YORK, Nov 10 (Reuters) - Alcoa Inc (AA.N), the world's largest producer of raw material, alumina, has already set some of its long-term supply contracts under a new pricing scheme that unties its link to the aluminum metal price, using instead a basket of indexes to pin down a spot price.
For at least 20 years, Alcoa had set its long-term alumina supply contracts as a percentage of the London Metal Exchange aluminum price. Alumina is the intermediate material that gets turned into aluminum and is made from the raw material bauxite.
"The one thing that you see is the fundamentals of the alumina refining business do not get reflected in the LME price. That's the real fundamental reason why we think there should be a change in how alumina is priced," said Tim Reyes, President Alcoa Materials Management.
Executives at the biggest U.S. aluminum producer spoke to Reuters after hosting a series of presentations for investors on Wednesday.
But executives said fluctuations in the aluminum price do not necessarily capture underlying costs of alumina and that alumina should be priced against its own set of fundamentals.
"The transactions we've concluded include an average of a weighting against multiple price indexes. I think you do that, because as a new system, there's not one defined index out there that everyone agrees is the best index," said Reyes, adding that both buyer and seller needed to feel the alumina contracts were being set at a fair market price.
Historically, Global Primary Products Group President John Thuestad said, volumes of spot alumina trades have been thin and prices not very transparent.
"So people get concerned about whether pricing on a spot index is actually reflecting the real market value," he said.
"As more of the volume rolls off in the long term, we're using the indexes and we have a good way of establishing the price, I think everyone will feel more comfortable," he said.
Over time, the more robust indexes will also stand out.
Alcoa plans to reset contracts with about 20 percent of its alumina customers per year, taking 5 years to fully roll out the new pricing plan.
Reyes said Alcoa's alumina customers require a dependable, long-term source of alumina supply that they will get with a multi-year contract. And Alcoa wants a price that reflects the fundamentals of the alumina refining business.
"Put them together and you can do the multi-year contracts with index pricing," said Reyes.
The alumina contract price will move as the index moves.
"It's not just a matter of price for customers. Other factors are important to them. The customer wants a long-term, good quality source with very strong logistics," said Reyes.
Thuestad added that an aluminum smelter requires a reliable consistent source of raw material, especially new large smelters now being built in the Middle East, Russia or China.
Alcoa executives, across the board, also said they were seeing increased demand for aluminum. For 2010, they project demand growth of about 13 percent over 2009, when global demand fell six percent. China will be this year's biggest driver. Its primary aluminum use likely rose over 20 percent, said Reyes.
Alcoa sees alumina demand nearly balanced with supply.
Longer term, the company forecasts a compound annual growth rate for the global aluminum industry of 6.5 percent by 2020. [ID:nN10222475]
The aluminum producer's flat-rolled products division, which supplies automotive, aerospace, consumer electronics and packaging markets, plans to generate $2.5 billion in new revenues by 2013, aiming to grow 50 percent faster than the world market.
Its engineered products division set a revenue growth target of $1.6 billion during the same period, coming from new products, market share gains and market expansions. (Reporting by Carole Vaporean in New York; Editing by Clarence Fernandez)