Tolling Agreements

What a tolling agreement is

A tolling agreement — sometimes called a processing agreement, a conversion agreement or, in metals, a toll-conversion contract — is a contract under which one party (the toller or feed owner) delivers a raw material to another party (the processor or converter), which processes it into an agreed product and redelivers that product to the toller, or to the toller's nominated buyer, in exchange for a fee.

Three features distinguish tolling from an ordinary sale:

• Title stays with the feed owner. The processor never buys the feedstock and never sells the product. It provides a service. Ownership of the material, and usually the price risk on it, remains with the toller from the moment feed arrives until product leaves.
• The processor's economics are a fee, not a margin. The processor is paid per tonne, per barrel or per unit of throughput (often with a fixed capacity-reservation element), rather than earning the spread between feedstock cost and product price.
• Yields, losses and quality are contractual, not incidental. Because the feed owner gets back product rather than money, the contract has to specify how much product a given quantity of feed should produce, what losses are acceptable, and what happens if output falls outside specification.

Tolling exists in almost every processing industry. Refiners toll crude and intermediate streams for traders. Aluminium smelters toll alumina. Steel service centres slit, cut and coat coil for distributors who own the steel. Bitumen terminals blend and modify binder for contractors. Rubber compounders mix customer-owned polymer with fillers and curatives. Tyre recyclers process end-of-life tyres into shred, crumb or tyre-derived fuel on behalf of the party that holds the tyres and the disposal obligation.

Why tolling exists

Tolling solves a mismatch between who owns material and who owns processing capacity. A trading company may have privileged access to feedstock and to end buyers but no plant. A plant owner may have capacity but limited working capital, limited market reach or a desire to avoid commodity price exposure. A government agency may need a product produced locally but have no appetite to own an industrial asset. Tolling lets each party specialise in what it does best: the feed owner manages supply, price risk and sales; the processor manages operations, safety and efficiency.

It also allocates capital efficiently. A processor that buys feedstock outright must finance inventory, hedge price exposure and carry credit risk on its customers. Under tolling, those burdens shift to the feed owner, which is often better placed — and better financed — to bear them. The processor's balance sheet becomes lighter and its revenue more stable. That stability is valuable in itself: lenders and investors value a fee-based plant differently from a margin-based one.

How tolling works in practice

Every tolling programme follows the same basic cycle, whether the plant is a fuel blending terminal in the Caribbean or a steel slitting line on the Gulf Coast.

1. Feed nomination and delivery

The toller nominates a quantity of feedstock for a processing period, typically a month or a campaign, and arranges delivery to the processor's site. The contract sets nomination deadlines, minimum and maximum quantities, delivery windows and the specification the feedstock must meet. Delivery may be by vessel, barge, truck or rail, or by in-tank or in-warehouse transfer if the material is already stored at the facility.

2. Receipt, measurement and sampling

When feed arrives, it is measured and sampled. Measurement method matters enormously: shore-tank gauging versus vessel ullage for liquids, weighbridge versus draft survey for bulk solids, piece count and coil weights for steel. The contract names the measurement standard, who performs it (often an independent inspector), and how differences between load and receipt figures are treated. The sample is analysed to confirm feed quality, because feed quality drives the yields the processor can be held to.

3. Processing

The processor converts the feed according to an agreed recipe or process specification. In a fuel blending context this might mean blending components to a finished-grade specification; in bitumen, modifying a base binder with polymer to meet a performance grade; in steel, slitting, cutting to length, pickling or coating coil; in tyres, shredding and separating steel and fibre. The processor schedules the work, but the contract sets priorities, turnaround times and what happens if the plant is unavailable.

4. Yield accounting

At the end of each period, the processor reports how much product was produced from how much feed. This is the heart of the arrangement. The contract will usually specify a guaranteed or expected yield — for example, a stated percentage of finished product per tonne of feed — together with a tolerance and an allowance for process losses. If actual yields fall short of the guarantee, the processor typically compensates the toller in product or in money; if yields exceed it, the contract decides who keeps the upside.

5. Product redelivery or offtake

Finished product is redelivered to the toller or delivered directly to the toller's buyer, either at the plant gate, into storage, or onto a vessel. Product is measured and sampled again. The certificate of quality issued at this point often becomes a document the toller uses in its own onward sale, which is why the testing regime must align with the toller's sales contracts.

6. Fee invoicing and settlement

The processor invoices the tolling fee — fixed, variable or both — along with any agreed pass-through costs such as utilities, additives, storage beyond free time, or demurrage. Settlement may be monthly in arrears, or netted against yield shortfall compensation and other adjustments.

7. Reconciliation

Periodically — monthly, quarterly and at the end of the contract — the parties reconcile inventory: feed received, product delivered, work-in-progress and losses. A clean reconciliation is the single best indicator of a healthy tolling relationship. A messy one is usually the first sign of disputes to come.

Who tolling is for

Tolling is not the right structure for every situation, but it is a powerful one for several types of participant.

Feedstock owners and traders

If you control a source of raw material — through an offtake agreement, a supply relationship or your own production — and you have buyers for a processed product, tolling lets you capture the value of processing without building a plant. Traders use tolling to turn a commodity they can source cheaply into a product they can sell at a premium, or to produce a product that meets a local specification that imported material does not.

Processors with spare capacity

Plants rarely run at full capacity all year. A blending terminal, a re-rolling mill, a compounding line or a recycling facility with idle hours can sell that capacity on a tolling basis, earning fee income without buying feedstock or carrying price risk. For processors with constrained working capital, tolling can be the difference between running at forty percent and running at eighty.

Governments, utilities and public bodies

Public entities that need a product — road binder for a national paving programme, fuel for power generation, processed material for infrastructure — but do not want to own industrial assets can contract a processor to toll material they procure, keeping control over specification and supply security while leaving operations to specialists.

Lenders and investors

Tolling programmes create well-defined, collateralisable inventory and predictable fee streams. Inventory financiers, borrowing-base lenders and private credit funds can finance the feed owner's inventory with a clear view of where it sits and how it converts to cash. Investors in processing assets value contracted tolling revenue as a stable, lower-risk earnings base.

New market entrants

Companies entering a market — for example, a distributor wanting to launch a polymer-modified bitumen line, or a tyre importer wanting to offer retreads — can use tolling to test demand before committing capital to their own processing.

Tolling compared with other structures

Tolling sits on a spectrum of arrangements between feed owners and processors. Choosing the right point on that spectrum is often the most important decision in a programme.

• Outright purchase and sale. The processor buys feed and sells product. It carries price risk and working capital, earns a margin, and controls marketing. Simple, but capital intensive for the processor.
• Tolling. The feed owner keeps title and price risk; the processor earns a fee. Capital-light for the processor; requires robust yield and inventory accounting.
• Processing with title transfer (buy–sell or "repo" structure). The processor buys feed from the owner and sells product back at a pre-agreed formula price. Economically similar to tolling but legally different — useful where tax, customs or financing considerations favour a sale structure.
• Offtake with prepayment. The buyer of the processor's product advances funds against future deliveries. The processor owns feed and product, but financing comes from the offtaker.
• Joint venture or profit share. Feed owner and processor share processing margin. Aligns incentives but blurs accountability.

We help clients model these alternatives side by side — on tax, customs, accounting, financing and risk — before settling on a structure. In many Caribbean jurisdictions, customs treatment of imported feedstock and exported product is decisive: inward processing relief, bonded warehouse regimes and free zone rules can make one structure far more efficient than another.

The commercial terms that matter

A tolling agreement lives or dies by a relatively small number of terms. These are the ones we spend most time on.

Tolling fee structure

Fees can be variable (per unit processed), fixed (a capacity reservation or "take-or-pay" charge, payable whether or not the toller delivers feed), or a combination. A fixed reservation fee gives the processor certainty and usually earns the toller a lower variable rate and guaranteed access to capacity. A purely variable fee gives the toller flexibility but no guarantee of priority when the plant is busy. Indexation — escalating fees with energy costs, labour costs or inflation — is common in multi-year contracts.

Guaranteed yields and loss allowances

The yield guarantee is where most disputes originate. The contract should define yield precisely (product out divided by feed in, on what measurement basis, adjusted for what feed quality), set a tolerance, specify process loss allowances, and state the remedy for shortfalls — replacement product, cash compensation at a market-referenced price, or fee reduction. It should also deal with excess yield: does the processor share in the upside, or does it belong entirely to the toller?

Feed and product specifications

Feed specifications protect the processor: if the toller delivers off-spec feed, the processor should not be held to yield or product guarantees. Product specifications protect the toller: the processor must produce product that meets an agreed standard, tested by an agreed method. Both should reference recognised standards — ASTM, EN, AASHTO, ISO or national standards — and name the laboratory or inspector whose results are binding.

Minimum and maximum throughput

Processors want minimum volume commitments to justify reserving capacity. Tollers want maximum volume rights to secure capacity when markets are strong. A well-drafted agreement sets both, with nomination procedures and consequences for under-delivery (take-or-pay) and over-nomination (best-efforts processing or premium fees).

Scheduling and priority

When several tollers use the same plant, scheduling rules determine who gets processed first. Priority might follow capacity reservation, date of nomination, or a rotating schedule. The contract should also address planned maintenance shutdowns, notice periods, and what happens to fees during outages.

Title, risk and segregation

The agreement must state unambiguously that title to feed, work-in-progress and product remains with the toller, and should address how commingled material is accounted for when the processor runs several tollers' feed through the same equipment. Risk of loss — who bears the cost if material is damaged, contaminated or destroyed while at the plant — should be allocated clearly and backed by insurance. In jurisdictions where retention of title is weaker, additional protections such as warehouse receipts, tripartite agreements or collateral management may be needed.

Insurance

Typical requirements include property insurance covering toller-owned inventory at the site, business interruption cover, third-party liability, environmental liability for the processor, and marine or transit cover for feed and product movements. Lenders financing the inventory will want to be named as loss payee.

Storage and free time

Feed and product rarely move instantly. The contract sets free storage time and charges beyond it, which matters greatly when vessels are delayed or buyers slow to lift.

Taxes, duties and regulatory permits

Customs status of imported feed and exported product, VAT or GCT treatment of tolling fees, environmental permits for the processing itself, and any product-certification requirements all need to be mapped before signing. A tolling programme that inadvertently triggers duty on imported feed can destroy its own economics.

Term, termination and step-in rights

Multi-year tolling agreements need robust termination provisions: for persistent yield failure, insolvency, prolonged force majeure or change of control. Lenders may require step-in rights allowing them to remove financed inventory, or appoint a replacement operator, if the processor defaults.

Our process

We run tolling mandates through a disciplined sequence. Every step produces a document the next step depends on.

1. Discovery. We map the feedstock, the product, the end market and each party's objectives. We test whether tolling is genuinely the best structure, or whether outright purchase, offtake or a hybrid would serve better.
2. Counterparty identification and verification. Where a client has material but no processor — or capacity but no feed — we identify candidates from our network and carry out KYC, sanctions screening, site verification and reference checks before any introduction is made.
3. Technical and commercial due diligence. We review the plant's capability, historical yields, quality systems, permits and insurance. We review the feedstock source and its specification history. Where needed, we commission an independent technical review.
4. Structuring. We design the commercial structure — fee model, yield regime, scheduling, title protection, customs treatment — and build a financial model showing each party's economics under base, downside and upside scenarios.
5. Term sheet and negotiation. We prepare a term sheet and lead negotiation, working alongside each party's counsel. Our advisory team includes attorneys experienced in energy finance and technology implementation who help translate commercial terms into enforceable drafting.
6. Financing. If the toller needs inventory finance, we arrange it — through trade finance banks, private credit providers or credit-insured structures — and negotiate the tripartite and collateral arrangements lenders require.
7. Mobilisation. We help set up nomination procedures, inspection arrangements, reporting templates and reconciliation processes before the first feed arrives.
8. Administration and monitoring. Where mandated, we act as programme administrator: tracking nominations, reviewing yield reports, reconciling inventory, coordinating inspectors and flagging issues early.

Financing a tolling programme

The feed owner in a tolling arrangement carries inventory that may be worth many times the annual tolling fee. Financing that inventory efficiently is often what makes the programme viable.

Common structures include:

• Inventory finance against warehouse receipts or tank certificates. A lender advances a percentage of inventory value against documents evidencing the toller's title to material at the processor's site.
• Borrowing-base facilities. A revolving facility sized to eligible inventory and receivables, with advance rates for feed, work-in-progress and finished product, re-measured periodically.
• Letters of credit for feed purchases. The toller's purchase of feedstock is supported by documentary credits, with the bank taking security over the material as it moves into the tolling cycle.
• Credit-insured receivables. Sales of finished product to end buyers are covered by trade credit insurance, allowing receivables to be financed at higher advance rates.
• Collateral management agreements. An independent collateral manager monitors and controls the financed material at the plant, giving lenders comfort that inventory exists and cannot be released without authority.

Our separate service on private credit and insurance wrappers describes these instruments in more detail.

Managing tolling risk

Tolling reduces some risks and concentrates others. The principal ones are:

• Counterparty risk. The toller depends on the processor's operational and financial health; the processor depends on the toller to pay fees and keep feed flowing. Both should be diligenced, and payment security — deposits, guarantees or standby letters of credit — considered.
• Operational risk. Plant outages, quality failures and safety incidents can interrupt production. Contractual remedies help, but they do not replace a careful assessment of the plant's maintenance record and management.
• Price risk. The toller carries commodity price exposure on feed and product. Hedging strategy should match the processing cycle, so that price risk is managed from feed purchase to product sale.
• Title and insolvency risk. If a processor becomes insolvent, tolled inventory on its site can become entangled in insolvency proceedings. Clear title provisions, segregation, warehouse receipts and local-law advice mitigate this risk.
• Regulatory risk. Changes in customs, environmental or product-standard rules can alter economics overnight. Change-in-law clauses allocate that risk.

Commodity-specific notes

Refined fuels and blending

Fuel tolling usually involves blending components into finished grades — for example, adjusting diesel to a national sulphur or cetane specification, or blending gasoline components to an octane and vapour-pressure target. Measurement and tank segregation are critical, and product certificates must satisfy the importing country's standards bureau.

Bitumen and asphalt

Bitumen tolling commonly covers polymer modification, emulsion production or blending penetration grades from different bases. Temperature management, storage time and additive dosing drive yields; performance-grade testing to AASHTO M 320 or equivalent defines acceptance.

Steel

Steel tolling — slitting, cutting to length, pickling, galvanising, painting — is typically priced per tonne processed, with scrap and edge-trim allowances defined precisely and ownership of trimmings agreed in advance.

Rubber and tyres

Rubber compounding tolls customer-owned polymer into masterbatch or finished compounds. Tyre recycling tolls end-of-life tyres into shred, crumb or TDF; here, the "feed" often has negative value, and the agreement must allocate gate fees, disposal obligations and environmental compliance carefully.

An illustrative structure

The following example is hypothetical and simplified, to show how the elements fit together.

A regional contractor needs a steady supply of polymer-modified bitumen for a three-year road programme but has no modification plant. A terminal operator in the same country has a modification unit that runs only part-time. A trading company can source base bitumen by sea on competitive terms.

Under a tolling structure, the trading company buys base bitumen and delivers it into the terminal under a tolling agreement. The terminal modifies it to the contractor's performance grade for a per-tonne fee plus a monthly capacity reservation. Yield is guaranteed at an agreed percentage, net of polymer added, with shortfalls compensated in product. Title remains with the trading company until modified product is lifted by the contractor under a separate sales contract. A trade finance bank finances the base bitumen against a warehouse receipt issued by a collateral manager, and the contractor's payment obligations are supported by a standby letter of credit. Each party carries the risk it is best placed to manage, and the programme can scale with the paving schedule.

Frequently asked questions

Who owns the product in a tolling agreement?

The feed owner — the toller — retains title to the feedstock, any work-in-progress and the finished product throughout. The processor provides a conversion service and is paid a fee. The agreement should state this explicitly and address how title is protected if material is commingled or if the processor becomes insolvent.

How is the tolling fee calculated?

Usually as a variable fee per unit of throughput, a fixed capacity-reservation fee, or both. Fixed fees secure capacity and typically reduce the variable rate. Multi-year agreements often index fees to energy, labour or inflation.

What happens if the processor produces less product than expected?

The contract should set a guaranteed yield with a tolerance. If yield falls below the guarantee for reasons within the processor's control, the processor compensates the toller, usually by delivering replacement product or paying cash at a market-referenced price. Off-spec feed delivered by the toller normally relieves the processor of the guarantee.

Can tolling work for small volumes or trial runs?

Yes. Trial tolling campaigns are a sensible way to test a plant's capability and a product's market acceptance before committing to a term agreement. We often structure a trial as a single campaign with simplified terms that roll into a term agreement if targets are met.

Is tolling treated differently for customs purposes?

Often, yes. Many jurisdictions offer inward processing or bonded regimes that suspend duty on imported feed that is re-exported after processing. The rules vary widely across the Caribbean and Latin America, so customs treatment should be confirmed with local advisers early in structuring.

How do lenders get comfortable financing tolled inventory?

Through clear title provisions, warehouse receipts or tank certificates, tripartite agreements between toller, processor and lender, insurance with the lender as loss payee, and, where appropriate, independent collateral management at the site.

Does Caribbean Equities operate processing plants?

No. We structure, negotiate, finance and administer tolling programmes between feed owners and independent processors. That independence lets us recommend the right plant and the right structure for each programme.

Which commodities do you structure tolling for?

Principally refined fuels and blending, bitumen and asphalt binders, steel finishing and re-rolling, rubber compounding and tyre recycling — the commodities where we have direct trading experience.

How long does it take to put a tolling agreement in place?

A straightforward agreement between diligenced parties can be signed in a few weeks. Programmes involving new processors, inventory finance or customs rulings typically take longer. We set out a realistic timetable at the discovery stage.

What information do you need to start?

The feedstock and target product, approximate volumes and timing, any candidate processors or feed sources already identified, and the commercial objectives of each party. With that, we can assess feasibility and propose a structure.