08 Jul 2022 | 15:50 UTC

Kaiser issues force majeure at Indiana aluminum mill on magnesium shortage

Highlights

Kaiser says magnesium supplier breached agreement

Warrick mill reduces output about 50% by end Q3

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Kaiser Aluminum has declared force majeure at its Warrick aluminum can sheet rolling mill in Indiana due to the limited availability of magnesium needed as a primary alloy in its products.

"The company is in the process of assessing the financial and operational impact of recent events that led to its declaration of force majeure and will provide an update during its second quarter earnings call scheduled on July 26," Kaiser said in a statement late July 7.

The downstream specialty aluminum producer said it has struggled to secure its requirement of magnesium supply to maintain Warrick's full can sheet production capacity since US Magnesium, its largest supplier, declared its own force majeure in September 2021.

"Although US Magnesium had continued to supply approximately 50% of its contractual commitment to Kaiser Warrick, deliveries have recently stopped," Kaiser said. "Kaiser Warrick has been unable to immediately source additional magnesium from alternative sources and has begun adjusting production levels based on the amount of magnesium currently available and otherwise scheduled for delivery from other suppliers."

The Warrick rolling mill has a nameplate capacity of about 310,000 mt/year of flat rolled aluminum for beverage and food packaging products. Kaiser reached an agreement to purchase the mill from Alcoa in late 2020, and the sale was finalized in April 2021.

In April, Kaiser filed a complaint against US Magnesium in the US District Court of the Southern District of New York alleging that the latter breached its contractual obligations regarding a supply agreement "to sell certain quantities of pure magnesium to Kaiser at specified prices, beginning in December 2020 and continuing through December 2022," according to court documents.

The supply agreement obligated US Magnesium to provide between 6,674 mt and 7,526 mt of magnesium to Kaiser Aluminum during the period of Dec. 1, 2020, to Dec. 31, 2021, and again during calendar year 2022.

A representative for US Magnesium was not immediately available for comment when contacted by S&P Global Commodity Insights July 8.

Kaiser said it is now working with customers to minimize the impact on planned deliveries.

"The company anticipates production and deliveries will be reduced by 30% to 40% in the month of July, and approximately 50% during the remainder of the third quarter, in each case based on currently contracted deliveries of magnesium and assuming no further deliveries from US Magnesium," the Franklin, Tennessee-based company said.

"The rolling mill will continue to operate at lower production levels until US Magnesium resumes deliveries or additional replacement magnesium becomes available to Kaiser Warrick," it added.

Complaint against US Magnesium

In its court complaint, Kaiser said US Magnesium's force majeure from 2021 "was vague, blaming the supply disruption on the unanticipated failure of 'critical pieces of manufacturing infrastructure.'"

"The force majeure declaration provided no information as to what steps US Magnesium was taking to rectify the failed 'manufacturing infrastructure' and no information as to when the failure might be rectified," it said in the complaint, adding that US Magnesium has since repeatedly refused to provide information on the status of its equipment.

"Based on information obtained by Kaiser, it appears that the equipment at issue was poorly maintained, its breakdown foreseeable, and not reasonably beyond US Magnesium's control," according to the court complaint. "Thus, the force majeure declaration was improper."

Kaiser said its magnesium supply agreement obligated US Magnesium to maintain a 60-day safety stock supply of magnesium for sale to Kaiser, calculated based on past purchase amounts, but US Magnesium later "took the position that the force majeure declaration excused [it] of its safety stock obligation," and its "refusal to supply safety stock threatened to disrupt Kaiser's own production schedule, jeopardizing Kaiser's relationships with its customers."

The aluminum producer said it was then forced to purchase magnesium from other suppliers at significantly higher spot market prices than the fixed prices it would have paid under its supply agreement.

The Platts weekly US assessment for pure magnesium from S&P Global settled at a midpoint of $8.75/lb at the end of June. The midpoint was up from $6.58/lb at the beginning of the year and $2.33/lb at the beginning of 2021.

Kaiser has already suffered damages of approximately $10.1 million as a result of US Magnesium's alleged breach of the supply agreement, and the damages continue to accrue, according to the court document. The company is seeking compensatory damages to cover losses incurred through its purchase of thousands of metric tons of magnesium in the spot market on short notice at prices higher than those secured in its supply contract.


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