China has taken to aluminum like a chef at Thanksgiving. The country's smelting capacity increased 25% a year in the decade up to 2009, according to Deutsche Bank, taking it to almost half the world's total.

All that capacity, combined with recession, has kept a lid on prices: Aluminum is down 15% over the past two years, while copper is up 6%.

Now, the China effect could squeeze smelters from the other side. Making a ton of aluminum requires about two tons of primaryingredient alumina. Most alumina is sold under contracts pricing it at 12%-14% of the London Metal Exchange aluminum price.

That arrangement provides a neat cost hedge for aluminum producers that have integrated alumina operations. But with the proliferation of smelters in China and elsewhere, the proportion of global alumina sales to third parties has risen from about a quarter in 1980 to nearly half today, says brokerage Davenport & Co.

Even as aluminum-smelting capacity expands, access to good deposits of bauxite, from which alumina is derived, is limited, particularly when you factor in the need for good rail, ports and processing infrastructure close to mines.

There is an analogy in the oil sector, where the biggest chunk of value added in the production chain is in accessing and exploiting upstream reserves. Refining is essentially a lower-value manufacturing process, taking a raw material and modifying it into a usable product. Hence, the oil refining business has long suffered low returns on capital, particularly when there is excesscapacity.

Aluminum smelting, another manufacturing business, has become less valuable as China has expanded capacity. Value is migrating up the production chain to alumina.

Goldman Sachs forecasts an average non-contracted alumina spot price of $330 a metric ton this year, 11% above the aluminum-linked price. By 2013, it projects that spread to have increased to 21%.

Both Alcoa and Rusal, the world's largest aluminum producers, reiterated this week that they favor severing the price link. In the past, they might have resisted losing this hedge. But, perhaps recognizing China's impact, a market price offers a way of at least monetizing the extra value in alumina.

A switch to market pricing, as contracts roll off, could squeeze margins for smelters without in-house alumina production, such as Century Aluminum. Big alumina producers with little exposure to downstreamaluminum production, such as Australia's Alumina, should benefit as realized prices for the product rise.

Moreover, their existing reserves should rise in value. In the case of steel, producers like ArcelorMittal have bought deposits of key ingredient iron ore to hedge the risk of surging Chinese steel production raising raw-material costs while damping end-product prices. A similar scramble to lock up bauxite and alumina supply could ensue.

Liam Denning

• capacity [kə´pæsiti] n.容量；智能；能力 (初中英语单词)
• copper [´kɔpə] n.铜 a.铜制的 (初中英语单词)
• primary [´praiməri] a.主要的 n.居首位的 (初中英语单词)
• arrangement [ə´reindʒmənt] n.整理；排列；筹备 (初中英语单词)
• elsewhere [,elsweə] ad.在别处；向别处 (初中英语单词)
• proportion [prə´pɔ:ʃən] n.比率 vt.使成比例 (初中英语单词)
• factor [´fæktə] n.因素；原动力；要素 (初中英语单词)
• excess [´ekses] n.超过 a.过分的 (初中英语单词)
• valuable [´væljuəbəl, -jubəl] a.有价值的，贵重的 (初中英语单词)
• thanksgiving [´θæŋks,giviŋ] 感恩节 (高中英语单词)
• decade [´dekeid] n.十年(间) (高中英语单词)
• squeeze [skwi:z] v.&n.压榨，榨取 (高中英语单词)
• ingredient [in´gri:diənt] n.(混合物的)成分 (高中英语单词)
• access [´ækses] n.接近；通路；进入 (高中英语单词)
• limited [´limitid] a.有限(制)的 (高中英语单词)
• switch [switʃ] n.开关 v.转换 (高中英语单词)
• exposure [ik´spəuʒə] n.暴露；曝光(时间) (高中英语单词)
• scramble [´skræmbəl] v.&n.爬；争夺；炒(蛋) (高中英语单词)
• aluminum [,ælju´miniəm, ,ælə´miniəm] n.铝 (英语四级单词)
• essentially [i´senʃəli] ad.本质上，基本上 (英语四级单词)
• taking [´teikiŋ] a.迷人的 n.捕获物 (英语六级单词)
• analogy [ə´nælədʒi] n.类似；类推；比拟 (英语六级单词)
• impact [´impækt] n.影响，作用；冲击 (英语六级单词)
• downstream [,daun´stri:m] a.&ad.下流的，顺流的 (英语六级单词)