Hongqiao introduces its own pricing system

Anyone interested in the global aluminium industry would have read all the news reports about Hongqiao and their latest financial reports. The world’s biggest aluminium company in terms of primary metal output captured headlines with their announcement. The fact that Hongqiao is growing to 6 million tonnes by the end of this year, and is now producing alumina at its Indonesia refinery caught everyone’s attention.

But Hongqiao made another announcement buried deep in their information pack. Since very late last year, Hongqiao, better known inside China as Shandong Weiqiao, has stopped using the Changjiang price for their metal sales. Hongqiao is now releasing their own daily metal price, a little like what Chalco is doing.

Hongqiao have argued that the Changjiang price is too influenced by the financial market, and that the financial market is pulling the true value of the metal down. (Changjiang is the major physical market, where SHFE is a futures market.)

But the interesting thing about the announcement is that it says the decision was made jointly with the Hongqiao downstream operation. That means that the true purpose of a “Hongqiao Price” is to set a transfer price that keeps a little more of the profit upstream.

The question of transfer pricing is one which multinational companies and any integrated company has to deal with. It’s especially important in fields such as personal computers, where a parent company might decide on a transfer price that makes a local subsidiary uncompetitive. It’s also the subject of tax lawyers looking at where best to book any profits.

Hongqiao delivers a lot of its metal in liquid form. Indeed, when I visited one of their plants late last year, trucks with crucibles dotted the road around the plant.

When we checked a day or so ago, the Hongqiao price was about RMB200 above the Changjiang price. Multiply that RMB200 by 5.2 million tonnes, and you see why it’s important.