Alcoa's Force of Nature

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He may have spared the U.S. oil & gas industry, but Hurricane Dean wasn't so kind to American aluminum titan Alcoa (NYSE: AA). After assessing the aftermath this morning, Alcoa announced that the Jamaican seaport from which its Jamalco subsidiary ships alumina has sustained "substantial" damage. This, combined with the ongoing loss of power at Jamalco's local bauxite mine and refinery, and a shutdown of production ordered prior to the storm hitting on Saturday, has convinced Alcoa of the need to declare "force majeure" on certain contracts with its customers.

"Re-start schedule, production lost and financial impact will be reported after a comprehensive assessment can be safely concluded." But let's not await the conclusions of Alcoa's assessment before starting our own. What do investors need to know about the possible effects of the Dean damage?

Who's hurt?
First and foremost, we should know who might be affected by the force majeure. According to Alcoa, its customers range from the obvious:

• AmBev (NYSE: ABV), which needs aluminum for beer cans.
• Embraer (NYSE: ERJ), which uses the lightweight metal in building airplanes.
• Hyundai and Polaris (NYSE: PII) -- same story, but for ground-based transport.

To the perhaps less so:

• Reliance Steel & Aluminum (NYSE: RS) and Worthington Industries (NYSE: WOR), both of which buy aluminum from Alcoa for reprocessing and selling.
• Nike (NYSE: NKE) is supplied specialty aluminum drawn tubes by Alcoa for its baseball bats.

Hold up a second. What's a force majeure?
In this context, it's an Act of God. A force of nature that could not have been anticipated at the time Alcoa signed a contract with its customer. "Declaring force majeure" has technical significance. Every supply contract (or at least, every competently drafted contract) contains a "force majeure" clause that releases the parties from their obligations to provide goods and services, or to pay for same, if an unanticipated event prevents performance as promised.

So to translate, what just happened is that Alcoa signed contracts promising to provide alumina to certain buyers at a certain price by a certain date. A storm came out of the blue, and made it impossible for Alcoa to fulfill all of its promises. Alcoa is now warning its customers about this, ensuring that if it cannot fulfill its contracts, its legal bases are all covered. Depending on the terms of the contract, customers may now have the option of canceling their contracts and finding another supplier, such as Rusal or Alcan, or just waiting for Alcoa to get its operations back in order and resume shipments.

Class dismissed.

Fool contributor Rich Smith does not own shares of any company named above. He is, however, a practicing (always practicing, never perfect) lawyer. Embraer is a Motley Fool Stock Advisor pick. The Motley Fool has a disclosure policy.