While the eyes of the world are on the Persian Gulf, the commodities markets continue to experience fluctuations (both related and unrelated to the issues in the Gulf). Recent news from Guinea, highlighted in the article below, suggests that the Guinean government is poised to take action to restrict the output of bauxite, in an effort to push up prices. 

The quoted article focuses on the potential effect of this tightening on freight rates and, specifically, the impact on capesize vessels. However, the impact of governmental influence on the supply of bauxite could have far-reaching consequences on long-term offtake agreements, the bauxite spot market (such as it is) as well as the aluminium market. 

Although Guinea is by no means the only country producing bauxite, and new projects are reported to be underway in West Africa, Australia and Southeast Asia, it remains a commodity whose pricing is sensitive to any adjustment in supply. Accordingly, the Guinean government's plan, if it proceeds, will be felt across the market — particularly if reports of China's diminishing domestic reserves are accurate.

This raises several important contractual considerations. While some contracts have specific provisions that deal with government restrictions, many of those will relate only to requisition. The governmental action may also fall outside any force majeure provisions, particularly where the restriction does not render performance impossible but merely more expensive or less profitable. Another issue may arise where a mine has sufficient stock allowances to service some customers, but not all. In those circumstances, is there an ability under the relevant contracts to make an election as to which customers to prioritise, and if so, can that election be challenged? Parties should review any such clauses carefully.

On pricing, many long-term contracts contain price mechanisms that allow for fluctuations in price to be accounted for so that parties do not have to renegotiate terms in the event of market changes. Those parties are then able to hedge against the anticipated trades. However, a sudden supply change (and its resulting pricing effect) may not be priced into the relevant forward contracts, which may leave market participants exposed.  

The impact will also be felt in the aluminium market. This would be relevant at any point, but will be felt particularly keenly now as aluminium supply is vital to the green economy, being a key component in solar panel frames, wind turbine structures, and electric vehicle battery components. Any disruption to bauxite supply therefore has the potential to ripple through multiple industries.

It will be important for parties active in these markets to review their contracts, supply chains and onward sale arrangements to ensure that the negative impact of any potential restriction on bauxite supply is mitigated and trade can continue to flow.