London (Platts)--21Sep2012/253 pm EDT/1853 GMT

US aluminum producer Alcoa will use ingot premiums to price its European flat-rolled products in an effort to increase transparency for customers, Bernd Schaefer, Alcoa vice president of European rolled products, said in an interview Friday.

"There is an overall understanding and broad acknowledgment in our customer basis," Schaefer said of the change to pricing.

He added that it had always been part of the common culture in Europe to use premiums in the pricing of aluminum and that Alcoa intended to make use of quoted ingot premiums in addition to a smaller conversion charge for its flat rolled products.

Schaefer said final flat-rolled product prices will be based on the LME aluminum price, plus the ingot premium with an additional smaller conversion charge.

Alcoa had used the LME price with a single conversion charge added to calculate the final flat rolled product price.

"It offers transparency to our customers and provides an understanding on the metal cost related price component versus the added value. ... We want the price to be as representative as possible," Schaefer said.

He added that the move will also make the pricing of flat-rolled products simpler.

In a letter to customers, Schaefer said the new pricing policy will apply to rolled products supplied to commercial transportation, consumer electronics, building and construction, packaging and industrial markets.

"All premium fluctuations -- those reflecting increases as well as those reflecting decreases in premiums -- will be passed through for orders or contracts closed," Schaefer said in the letter.

Schaefer said that Alcoa would make use of floating aluminum premiums for some of its European long-term contracts next year.

He compared the process to that used in the stainless steel industry where producers make use of a monthly floating alloy surcharge that tracks raw material prices from the previous month to price stainless steel material for the current month.

"It should be similar to the alloy surcharge that we also see in other regions and industries," Schaefer said.

He added that using a floating premium was the most transparent way of pricing.

"We will use a monthly floating basis or a quarterly one," he said.

Schaefer said premiums had increased significantly over 2012 and now make up a much larger percentage of the overall price for aluminum products.

Premiums for duty-paid currently represent around 11% of the final cost of aluminum when applied to the LME cash price.

In January, premiums for duty-paid only represented about 7% of the final cost of aluminum when applied to the LME cash price.

"Prevailing principle is to decouple the premium as a separate metal cost, which varies according to periodic market conditions," he said.

Schaefer said that effectively it was about finding a common price understanding between the producer and the customer.

--Greg Smart, greg_smart@platts.com --Edited by Jeff Barber, jeff_barber@platts.com