The new method for dictating how alumina contracts are priced is gaining traction, even among aluminum producers that previously opposed it, they told a conference Tuesday.

The world's largest aluminum producers, including U.S.-based Alcoa Inc. (AA) and London-listed Rio Tinto Alcan, a subsidiary of Rio Tinto PLC (RTP), have been strong proponents of the move to link pricing to costs.

Previously, alumina contracts were priced relative to the aluminum price on the London Metal Exchange.

"We're very pleased with how the pricing structure is maturing," said Alcoa's chief sustainability officer Kevin Anton, adding that there was ample transparency with the new indices that have been developed.

"The push to new pricing was due to cost input factors in making alumina, and there was a disconnect between the fundamentals in the market. Refineries had been lagging responding to demand, but now alumina is setting the price they can build new capacity. The new contract pricing method is very successful and we'll continue to see it mature," he said.

Alcoa is the world's largest third-party seller of alumina.

Alumina, the raw material used to make aluminum, was previously priced as a percentage of the LME price, usually between 11% and 14%. A move to an index-based system was seen previously in the iron ore sector after strong backing from key suppliers to China's stainless steel sector, BHP Billiton PLC (BHP) and Rio Tinto.

But producers noted that the two commodities, iron ore and alumina, are very different and their pricing systems shouldn't be compared. Producers stressed that the fundamentals of the markets set the price, and not the mechanism.

Rio Tinto Alcan's head of primary metal Jean Simon said alumina producers need to be able to invest in refineries but costs have hindered that. "An index gives a good signal that the price of alumina should be linked to potential investment because somewhere along the line there will be a shortage," he said.

Even producers that previously expressed concern at the idea of delinking alumina contracts from the price of the metal, used in housing and construction, have come around more to the new index method. Opposition was especially strong from aluminum producers that are net buyers of alumina.

"Index pricing of alumina has gained traction; the big concern or challenge is that the spot market is small, which can create a lack of liquidity in the indices," said Tim Murray, chief financial officer of Aluminium Bahrain, or Alba, a net buyer of alumina. "We still prefer LME-linked contracts due to the hedge and the correlation between the two (alumina and aluminum)," he added.

Murray said that there is a much more frequent repricing of the percentages as a result of the new indices.

Costs that producers say they are keen to reflect in the new method include caustic, energy and transportation.

The producers were speaking at the American Metals Markets aluminum summit in New York.