Zinc Price Fell. The Refinery Reduced Your Allocation. You Had a Contract.
Quote from chief_editor on June 1, 2026, 3:00 amLong-term supply contracts with major zinc refineries are worth less than they appear when the refinery has operational flexibility and legal counsel that wrote the force majeure clause.
A zinc trader had signed a 12-month supply agreement with a European zinc refinery for 2,000 tonnes per month of SHG zinc, at LME minus a small discount. The contract included a minimum delivery commitment: the refinery would deliver no less than 90% of the monthly quantity, with a make-up provision for any shortfall.
In the fourth month of the contract, zinc prices fell sharply. The refinery, whose production costs were partly fixed and whose margin at the new price level had deteriorated, reduced deliveries to approximately 60% of the monthly quantity. Their stated reason: production curtailment due to energy cost increases, which they characterized as qualifying under the contract's force majeure clause that covered "exceptional increases in input costs making production economically non-viable."
The trader had sold forward against the contract — they had commitments to their buyers based on their expected supply. The shortfall forced them to cover in the spot market, at prices above their contracted rate, to meet downstream obligations. The cost of covering: approximately $180,000 over three months.
The trader's legal team assessed the force majeure claim. The energy cost increase, while real, had increased the refinery's production cost by an estimated 8%. The refinery's own publicly available communications suggested it remained operationally profitable. Whether an 8% cost increase made production "economically non-viable" was a judgment that required interpretation — the kind of interpretation that ends in arbitration.
Force Majeure in Supply Contracts Is Not a Cost Fluctuation Clause
Force majeure provisions in commodity supply contracts are intended to excuse performance in the face of genuinely extraordinary events: natural disasters, wars, government seizure, physical destruction of production facilities. They are not — under the standard interpretation of English and most civil law systems — designed to excuse performance because production costs increased and margins deteriorated.
The refinery's argument — that energy cost increases made production "economically non-viable" — invokes a phrase that was presumably negotiated into the contract. Whether the actual energy cost increase crossed the threshold of what the contract's language was intended to cover is a fact and law question. It depends on the exact wording, the context in which it was negotiated, and how arbitrators or courts interpret economic non-viability relative to actual cost increases.
In principle, a refinery that is still producing and selling zinc — just at reduced profitability — has difficulty arguing that production is economically non-viable. Non-viability is a high standard that implies losses so severe that continued production would be irrational, not merely that the margin has compressed. But the standard depends on the contract language, and the contract language was drafted by someone.
Industry estimates for commodity supply contract disputes involving force majeure force majeure invocations during price downturns suggest that these disputes are more common in markets where refinery or production costs are partially variable and producers have economic incentives to curtail when margins deteriorate. The pattern is documented across zinc, aluminum, and nickel refinery contracts.
Managing the Downstream Exposure When Supply Is Uncertain
A physical commodity trader who commits to downstream supply on the basis of a supply contract faces a structural problem: the contract may not deliver what it promised, but the downstream commitments are obligations the trader cannot escape as easily. The trader is the bridge between upstream supply risk and downstream delivery obligation.
Managing this requires either: building supply redundancy (multiple sources so no single source's failure is catastrophic), negotiating downstream contracts with corresponding flexibility (limited deliveries or optionality clauses that reduce the downstream commitment when upstream is disrupted), or pricing the supply contract risk into the downstream margin (charging a higher price to buyers to compensate for the supply uncertainty premium).
Traders who pass through a supply contract at face value — committing to deliver what the contract promises — without considering the probability that the supply contract underdelivers are underpricing their own risk. The supply contract is the trader's risk management tool. Its legal enforceability is one component of its value. The refinery's actual willingness and ability to deliver is another, and the two are not always aligned.
Long-term supply contracts with major zinc refineries are worth less than they appear when the refinery has operational flexibility and legal counsel that wrote the force majeure clause.
A zinc trader had signed a 12-month supply agreement with a European zinc refinery for 2,000 tonnes per month of SHG zinc, at LME minus a small discount. The contract included a minimum delivery commitment: the refinery would deliver no less than 90% of the monthly quantity, with a make-up provision for any shortfall.
In the fourth month of the contract, zinc prices fell sharply. The refinery, whose production costs were partly fixed and whose margin at the new price level had deteriorated, reduced deliveries to approximately 60% of the monthly quantity. Their stated reason: production curtailment due to energy cost increases, which they characterized as qualifying under the contract's force majeure clause that covered "exceptional increases in input costs making production economically non-viable."
The trader had sold forward against the contract — they had commitments to their buyers based on their expected supply. The shortfall forced them to cover in the spot market, at prices above their contracted rate, to meet downstream obligations. The cost of covering: approximately $180,000 over three months.
The trader's legal team assessed the force majeure claim. The energy cost increase, while real, had increased the refinery's production cost by an estimated 8%. The refinery's own publicly available communications suggested it remained operationally profitable. Whether an 8% cost increase made production "economically non-viable" was a judgment that required interpretation — the kind of interpretation that ends in arbitration.
Force Majeure in Supply Contracts Is Not a Cost Fluctuation Clause
Force majeure provisions in commodity supply contracts are intended to excuse performance in the face of genuinely extraordinary events: natural disasters, wars, government seizure, physical destruction of production facilities. They are not — under the standard interpretation of English and most civil law systems — designed to excuse performance because production costs increased and margins deteriorated.
The refinery's argument — that energy cost increases made production "economically non-viable" — invokes a phrase that was presumably negotiated into the contract. Whether the actual energy cost increase crossed the threshold of what the contract's language was intended to cover is a fact and law question. It depends on the exact wording, the context in which it was negotiated, and how arbitrators or courts interpret economic non-viability relative to actual cost increases.
In principle, a refinery that is still producing and selling zinc — just at reduced profitability — has difficulty arguing that production is economically non-viable. Non-viability is a high standard that implies losses so severe that continued production would be irrational, not merely that the margin has compressed. But the standard depends on the contract language, and the contract language was drafted by someone.
Industry estimates for commodity supply contract disputes involving force majeure force majeure invocations during price downturns suggest that these disputes are more common in markets where refinery or production costs are partially variable and producers have economic incentives to curtail when margins deteriorate. The pattern is documented across zinc, aluminum, and nickel refinery contracts.
Managing the Downstream Exposure When Supply Is Uncertain
A physical commodity trader who commits to downstream supply on the basis of a supply contract faces a structural problem: the contract may not deliver what it promised, but the downstream commitments are obligations the trader cannot escape as easily. The trader is the bridge between upstream supply risk and downstream delivery obligation.
Managing this requires either: building supply redundancy (multiple sources so no single source's failure is catastrophic), negotiating downstream contracts with corresponding flexibility (limited deliveries or optionality clauses that reduce the downstream commitment when upstream is disrupted), or pricing the supply contract risk into the downstream margin (charging a higher price to buyers to compensate for the supply uncertainty premium).
Traders who pass through a supply contract at face value — committing to deliver what the contract promises — without considering the probability that the supply contract underdelivers are underpricing their own risk. The supply contract is the trader's risk management tool. Its legal enforceability is one component of its value. The refinery's actual willingness and ability to deliver is another, and the two are not always aligned.