Force Majeure as a Way of Life in the Commodities and Derivatives Markets-But Not for Long
/By Stan Szymanski
During the last month Newmont, the worlds’ preeminent gold company and leading producer in copper, silver, zinc and lead has declared ’Force Majeure’ on deliveries of at least some of its product in a failure to satisfy contractual agreements.
"Due to interruptions in production caused by the union strike at Newmont's Peñasquito mine in Mexico, force majeure has been declared with certain customers for some of the mine's products," Newmont said in an emailed statement. (Reuters 6/23/23)
Reuters mentions that Newmont is a producer of zinc, lead and gold. It makes -no- mention that Newmont is a large silver producer as well. This is a convenient omission that would help to not spook the silver or the silver derivatives markets.
What is ‘Force Majeure’?
…’Force majeure is a clause that is included in contracts to remove liability for unforeseeable and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations. These clauses generally cover natural disasters, such as hurricanes, tornadoes, and earthquakes, as well as human actions, such as armed conflict and man-made diseases.’… (Investopedia)
In addition to a halt in production at the Newmont Peñasquito location in Mexico…
…’Wildfires in Quebec had also temporarily halted operations at the company’s Eleonore mine in June’…(mining.com 7/23/23)…
…’Chief Operating Officer Rob Atkinson said the Eleonore Mine is ramping up again now that the threat from the fires in Quebec has abated.’…(Elko Daily 7/23/23)
So that means that the Elsinore mine is also not producing as of 7/23/23. Therefore, Force Majeure has been present at the Newmont Elsinore mine as well.
Precious metals is not the only commodity business where Force Majeure has been employed. In Orellana, a province of oil rich Ecuador, Force Majeure was recently in place for 106 days in the oil rich region after local social unrest:
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…’These assets were paralyzed for several weeks, precisely, after the incidents that occurred at a social level, which caused serious damage to several wells. …At the moment, the global production of EP Petroecuador exceeds 400 thousand barrels of oil equivalent per day.’…(BN Americas 7/24/23)
The mammoth derivatives market of the financial industry has just reprogrammed the law its’ members live by. This way, they can tell the party on the other side of the trade in a faster and more pragmatic manner of their inability to deliver their part of the bargain. A more convenient ‘Force Majeure’:
…’The International Swaps and Derivatives Association, Inc. (“ISDA”) has published a form of amendments to the Notices provision and the alignment of treatment of English law and New York law governed Credit Support Annexes (“CSAs”) following the occurrence of an Illegality or Force Majeure Event under the ISDA Master Agreement. This document was published on 30 May 2023, and offers parties standard form drafting they can incorporate into an ISDA Master Agreement either at the time of negotiation, or through a bilateral amendment. …
One of the key changes is the addition of email as a means of delivering notices under Section 5 or 6 (sections of the agreement dealing with termination/close-out), with clarification on the effective delivery time. This allows for more efficient delivery of close-out notices, which might be especially relevant where parties are based in different cities or when physical delivery might be impossible or impracticable (for example, due to COVID restrictions).’… (JD Supra 6/1/23)
So even the financial derivatives markets have made plans to employ’Force Majeure’ (and made it more timely) for when the fulfillment of contract obligations becomes impossible.
‘Force Majeure’ (FM) is a tactic that you really only get to employ with full effect one time. Once you ‘go to the mattress’ and apply FM in a business relationship, there is an immediate deterioration of trust and it now becomes something less than honorable, less than reputable.
Force Majeure is becoming ‘a thing’. The problem with this is that contracts struck after the exploitation of FM will contain a financial and even social risk premium. In entering into a contract with someone who has done you wrong once will cost the other party more to do business with you next time.
This will lead to higher prices for the goods and commodities at the heart of these contracts. That is why I believe that Reuters did not mention that Newmont is a substantial producer of silver. A silver market that breaks hard to the upside will unhinge prices for the rest of the precious metals and urge them all substantially higher.
But that is what will happen with the employment of FM. Distrust and inherent lack of product due to unfulfilled contracts will beget the lack of commodities crossing borders. This will lead to higher prices and serious lack in some geographical areas. Talk about a recipe for social unrest. The quote, ‘When goods don’t cross borders, armies will’ (often attributed to Bastiat but actually was the work of Otto Mallory) describes the ultimate outcome of Force Majeure.
Force Majeure is really a tool of last resort. Contractual participants can back out of a contract-once. After that, they become radioactive (with WWIII starting it might be literal as well as figurative) and business partners back away (if not walk away) from doing business for a long, long time.
For the individual: when you start to see FM in a marketplace, you can expect to see higher prices and unavailability of the commodity in question. While this is not particular financial advice to anyone-having physical precious metals (PM’s) to preserve your wealth is an idea whose time has come. At a time when bank failures (in 2023, Silicon Valley Bank and others) is just another word for Force Majeure, one must seriously consider physical PM’s so that you hold something that is no one else’s liability.
Force Majeure generally means that one party keeps the goods they promised to deliver and they other party gets nothing they expected to get. When it comes to your personal finance, consider taking measures now so that when the other party fails to deliver on things like (but not limited to): your retirement savings, your food and even the roof over your head that you aren’t left holding the bag that you expected something to be in that now only holds hot air.
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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.