In the world of base oil trading, the margin between profit and loss is often narrow, and the difference may depend upon details of a deal. Must the seller get the cargo to a terminal or only as far as the refinery gate? Which side is responsible for transportation, and who pays for insurance? Especially in view of things that can go wrong, nothing can be left to chance.
That is why the International Chamber of Commerce provides a tool called Incoterms that serve as a framework of rules for trading. The base oil industry and many others use them to spell out the responsibilities of different parties.
Incoterms are a set of 11 trade terms which are used in conjunction with the three major contracts used in the international sale of goods: the Contract of Sale, the Contract for Carriage and the Contract for Payment. They have been around since 1936, and are amended by the ICC every 10 years. The current set – Incoterms 2010 – was published Jan. 1, 2011.
Incoterms are the rules that link and support the smooth execution of these three very different contractual documents, said Dr. Jim Giermanski, a business professor at Texas A&M International and member of the Board of Advisors at the universitys Center for International Business Studies. In effect, they serve as the mortar or glue to hold the three contracts together.
They are important because a lot of companies have a very small profit margin, added Wayne Krennerich, president of Acceleron Trade Services, a Houston-area based company which provides import/export related services to domestic U.S. and international companies. Incoterms are all about protecting that profit margin because their intent is to eliminate unexpected expenses.
Essentially, they provide guidelines that distinguish the duties, risks and responsibilities the buyer and seller assume in a transaction. They spell out the practical arrangements for transportation and delivery of goods, and how cost and risk are divided. The 2010 rules also address contractual obligations dealing with heightened security related to clearance of the purchased product and chain of custody issues.
The rules have gained such widespread acceptance that governments, legal authorities and businesses worldwide recognize their interpretation of the most commonly used terms in international trade. The ICC itself, headquartered in Paris, offers arbitration services to help international trading parties overcome disputes.
They have very clear legal implications in their usage, Giermanski said, because they have been tied to the United Nations Convention on Contracts for the International Sale of Goods (CISG). In the United States, that throws litigation over conflicts into the U.S. Federal Court system since the CISG is a treaty and as a result Federal law.
A first-time trader on the international market can buy a book from the ICC (www.iccwbo.org) that will provide the Incoterms rules, training on how to use them and model contracts and clauses that can be written into any agreement.
Incoterms appear in contracts by their three-letter designation. Four of them – FAS, FOB, CFR and CIF – are used for trade transactions that only involve sea and waterway transport. Seven of the terms – EXW, FCA, CPT, CIP, DAT, DAP and DDP – can be used for any mode of transport. (See accompanying chart for definitions of each term.) For the transport of base oils, seven terms – FCA, FOR, DAF, FOB, CFR and CIF – are most commonly used.
The terms are set according to situation, location and local rules regarding insurance, according to Ray Masson, director of Pumacrown Ltd., a trader and broker of petroleum products in East Grinstead, U.K. The terms extend over the period of delivery. So, for example, an FOB sale will cover all eventualities during the entire delivery process. No one monitors the actions, merely abides by them.
The latest iteration reduced the number of Incoterms from 13 to 11, combining four previous, overlapping rules into two new rules (DAT and DAP). More significantly, the 2010 rules introduced an element that had not been part of previous editions: security.
In the introduction to the 2010 rules, the ICC notes, There is heightened concern nowadays about security in the movement of goods, requiring verification that they do not pose a threat to life or property for reasons other than their inherent nature. Therefore the Incoterms 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances.
Giermanski said that the issue of security boils down to how can we be sure what the manifest said is in the container is really in that container. So it becomes a combined commercial/security interest.
To comply with the new safety clearance requirements, industry has begun using electronic manifests that are forwarded to customs officials. Electronic manifests arent perfect, Giermanski said. No security system is. Some of the information contained on that e-manifest is directly linked to Incoterms.
Giermanski said that Incoterms 2010 allow shippers to receive expedited customs treatment, to verify that proper cargo and quantity was loaded at point of export, to affirm that the container was properly stored in transit, and to protect against unauthorized placement of contraband or counterfeit products while in route to the destination.
In the end, Incoterms exist to take the uncertainty out of trading.
I urge my clients to use them for every foreign transaction, Krennerich said. Choose a term that is appropriate to the goods to be traded, to the means of transport and to any additional obligations. Be sure to specify a named place or port as precisely as possible, where the transaction will occur because that is the point where liability will transfer from buyer to seller.
You dont want to be haggling while your shipment is in transit, Krennerich warns.