SMICE EDUCATIONAL SERVICES
FOREIGN TRADE NEGOTIATORS (FTN)
Updated: Dec 1, 2020
Corrections applied over time
ADVANCED trading updates and business applications and advice for practitioners of the FTNX doctrine of trade. Advice on this site page is not suitable for non practitioners. Personal opinions of the author also included, served with good intent and without prejudice.
WHAT DO WE MEAN BY “EXPORT READY SUPPLIERS”
Let's say FTNX has secured a contract for the supply of frozen beef cuts to China worth 2 billion dollars over 5 years.FTNX naturally would have tried Australian abattoirs first, before venturing to source such goods elsewhere, as Australia has a large stock of high-grade cattle to be able to service such an order. An Australian government body may not issue an export permit to the exporter, causing FTNX to waste its time in attempting to act on such a deal. In effect, we are talking about ‘import and export permits.’ Many government bodies from around the world feel that this kind of deal is in ‘their territory’ and that; if a valuable resource, available within I.e: Australia, is sought by country currently unable to import such goods, a deal could be negotiated between one government body with another, where a deal could be ratified to supply ‘beef cuts’ into China, in return for I.e: “reducing Chinese import tariffs” on let us say Australian wines. Government bodies negotiate on international trade deals, often on the similar premise stated. When a PCT engages with a supplier the first thing it must ascertain is whether or not the supplier is ‘export-ready.’ The supplier will know if they are ‘export ready’ as per custom directives enforced in its own country. If such a large contract is secured by FTNX, as an option ( based on abilities and skill of each PCT) could try to convince the local government that it needs an ‘export permit’ issued to an ‘export-ready facility,’ as such a contract will create, i.e: “200 new jobs.” The problem here is one of ‘legal circumvention, time and expenses’, as the government body will need to see “all details of the proposed deal” before committing to such, and the meat processor will also need to spend money to bring its facility up to ‘export standards’ as well, which is again another issue that needs to be clarified instantly when goods have been sourced. Such an option is unacceptable as the PCT may need to spend many months if not years on such a deal. While the PCT can deal in commodities worldwide, it’s the ability of suppliers being able to export such goods in the first place that must be considered and confirmed first. FTNX would have better spent its time sourcing goods sought from another country already able to export such goods to China- this would have been the optimal course to take. In all cases, the PCT must first confirm that the supplier has attained export standards certification. In this light, if the country of destination cannot accept such goods, the PCT may test other marketplaces while the validity of the offer is in effect. Export ready buyer also refers to the RWA ready supplier; as stated further below under ‘RWA’
READY WILLING AND FINANCIALLY ABLE (RWA)
A common financial term use in trade is “ RWA” which is legally defined term as well. As it refers to the end buyer having the capacity to secure a DLC from its bank to pay for goods, so does it apply to a supplier or exporter. All the expenses associated with getting ordered goods to a port of loading is for an ‘export ready supplier’ to bear. There may be plenty of iron ore near Colima , Mexico but if nobody is prepared to bear expenses to mine it, process it, and deliver such goods to a local port, then such goods should have not been offered to anyone in the first place.
CHARTER PARTY BOL
A PCT cannot charter a ship unless it obtains the DLC from the end buyer with the term ‘Partial Drawings’ marked as ‘Allowed.’ This act allows the payment of freight in ‘Advance,’ which in turn will cause the BOL to be issued as ‘Pre Paid.’ The bank acting on a UCP credit will expect a ‘Pre-paid BOL’ from the supplier booking the ship. In other words, should the end buyer not pay for freight, the supplier (or the PCT) will have its credit drawn as a debit accordingly when the freight is ‘earned’. This is why most PCT’s do not have the required experience to charter the ship outright. Under this specific transaction, if a ICC UCP endorsed ruling credit is used, it’s the DLC issuing bank, as per the ‘rules’ applied to the credit, who will automatically expect to see the BOL endorsed by the ‘Shipowner’ and not by the ‘Charter party.’ The bank then allows payment to proceed on the goods, once they are ‘delivered’ (POL) in accordance with the incoterms used. A “Way Bill” is not sufficient to satisfy UCP rules, as it’s only an indication (a receipt) that the goods are on board a named ship. In a CIF transaction, the bank will allow payment for goods to be “honoured” once delivered at POL, and identify the disclosed ‘freight component’ described on the invoice, as a “credit to favour the end buyer.” The end buyer obtains the goods (which have been already paid for at POL) and pays for freight at destination port, as this is when “freight has been earned.” The end buyer has the amount quoted for freight, in its account as a credit, which the sellers bank had left behind for this purpose in accordance with UCP rules.The supplier does not take this pre-paid rate, when collection on the DLC takes place.This is the proper CIF application. If the PCT takes on a CIF transaction then it must secure a “Shipowners endorsed” BOL, when applying a UCP endorsed DLC to the transaction-the bank will expect as much as its bound to act by the rules of issuance, and later ICC Unified Rules of Collection (URC). The bank is simply selecting the safest option; the same option we need to apply, for the very same reason. In a simpler explanation; if the goods were sold to the end buyer for Let’s say, $50.00 per MT ( the goods sell price initiated by the PCT acting as Seller) and the goods were purchased from the supplier by the PCT( now acting as the Buyer) for $48.00 per MT to which; the freight component was established as being $1.00 per MT, the supplier will leave the $1.00 per MT behind and take $48.00 for payment of goods when delivered at POL( the buy price as sold to the PCT). The PCT now has $2.00 per MT in its account. The PCT takes its profit of $1.00 per MT to pay himself and/or commission to his string members assisting on the deal. The $1.00 per MT now remains in the account of the end buyer as a credit. The ship arrives at POD, the end buyer pays all (his) import cost and freight earned for carriage to POD. The freight component is already in it the end buyers account as per the freight component rate quoted to the end buyer; as offered when the contract of purchase and supply was made with the PCT ‘acting as buyer’ and the supplier. The supplier books the ship because he has the financial instrument supporting the payment, but the payment is actually collected by the end buyer at POD when the freight is ‘earned.’ To try another method,(as some PCT’s have tried to do) will lead to delays and other legal problems.
CRUDE OIL FORMULATIONS
The PCT must approach an ‘export ready’ supplier of fuel or crude oil with a OTP or MOU rather than an ITB is the preferred application. The experience of the PCT dictates which approach is taken.The PCT must first ascertain quantities and a price basis it is prepared to honour should it buy the pre secured product sought.The PCT must not expect to, nor rely upon receiving a sellable price basis, from the supplier; it’s the job of the PCT to actually make the offer to buy, which means the PCT must also include a well thought out price basis, for which there are many. The PCT must first secure supply at all times, before attempting to sell such goods is a premier rule. The price basis and discount are implemented to reflect an ‘MT’ unit price. I.e; Bloomberg price for Brents is let say US$ 40.00 Per MT with a BBL to MT conversion factor for 38 API is around 7.5 BBL per MT, therefore a base buy price offered in any given ‘tracked month’ of delivery, is around US$ 300.00 per MT FOB. The PCT must stipulate that the price is fixed for first delivery only, once the contract is signed.This will ensure that first delivery takes place with no issue pertaining to a sudden price rise on the index being tracked. Asking for a fixed 5.0% per MT discount on the index price used, is not unreasonable. This now means the PCT is able to sell such goods to its end buyer for lets say; I.e: price payable as per Brents listing 15th of each month, less 2.0% discount, earning the PCT a gross pre OPX of 3.0%. We cannot sell not buy such goods as per “average price basis, day before, day on, day after loading’ as we need to advise the DLC to pay for goods 30 days before first delivery to which a DLC carrying ‘a value’ must be apparent. We are not ‘end users’ of any goods we buy and sell. The PCT as seller has given its end buyer the same indexed basis, less a 2.0% discount. From this gross 3.0% factor all PSI assisting the PCT, obtains a commission payment. LDD also is derived from this factor, in where once all OPX and commission payment is accounted for, what remains is net; and earned by the PCT heading the deal. This is the simplest trading aspect when a variable price basis is sought. This is the basis from which all other much more complex formulations may be created by the PCT. In a fixed price deal, such complex matters regarding formulations are not an issue. What is an issue is that a ‘premium’ might also need to be offered to the supplier whether a fixed or variable price basis is being used–to clinch supply; I:e: Platt’s less 5.0% discount plus 2.0% floating premium. Thus the PCT has rebated 2.0% to the supplier every month, from its 5.0% mark up leaving the PCT with 3.0% net of which the PCT offers it end buyer a 1.50% discount. A premium may be offered anytime, if it means ‘securing supply’ is assured, more so when prices are very high and continually moving upwards on the SPOT index. This lower end net profit earnings is excellent perspective when a lone PCT is conducting the deal with no stringed PSI’s.The PCT must remember that the DLC has a 5.0% (plus or minus) tolerance factor ; that is; a DLC as per UCP rules, may be collected upon so long as each invoice is within the DLC tolerance factor. If a great potential buy/supply price has been obtained, then asking for a 6.0% discount is reasonable. Asking for an 8.0% or more discount, the PCT is deemed as having entered into an unreasonable aspect of trade. The PCT must be prepared not to make any gains on a delivery, if it exceeds this DLC tolerance factor by more than the net profit expected. The astute PCT will attempt not to change the DLC value should prices become erratic on the tracked index being used, as each waiver sought created delays and expenses; the PCT is able instead, run a transparent debit and credit balance sheets which is consolidated lets say every 4 months. On the fourth month either the supplier or PCT is in credit or debit in where accounts are brought up to balance at such a time, thus as it applies to the PCT, also applies to its end buyer. At the end of it all; the PCT may have expected net average profit of 3.0% when in fact by paying out a few LDD’s and by paying out to consolidate accounts ‘a few times’ the average final sum of 2.50% is realised. This is why dealing in crude oil, more so than processed fuels may only be attempted by every experienced practitioners of the FTNX Doctrine as such deals are complex and truely define the skill of the crude oil trader. In essence the gross profit secured is really a ’back up ‘ fund, for when things go wrong in where rebates may prevail often. ULS D2 is by far the best product to source as the world of heavy industry, agriculture and transport depend heavily on D2. D2 carrying a Cetane number of 50 or more and a Sulphur content of 10 ppm or less is highly sought after, as this type of grade allows D2 to be imported into most countries. FOB delivery modes is the most often offered, where some suppliers with their own ships are able to also offer CFR or CIF. Do not offer fuel based products from land locked countries; the large quantities offered will often not reflect the needs of the ‘smaller’ customer. The PCT must offer an online assessable reputable price index to follow (I.e: Platt’s , ICE etc.) from which a discount is sought on a long term monthly revolving contract of supply.The price basis is ‘on board’; meaning ‘Metric Tonnes’ measurement apply. The PCT must obtain an accurate BBL to MT conversion factor to achieve as much when dealing in crude oil.Sweet rather than sour crude oil should only to be sourced as well. FTNX has seen a lot of strange, unfounded and false crude /fuels offers being made by ill informed traders from 1998 to 2020. A PCT can only work effectively within the bounds of its legal capacity and scope; working beyond such a scope attracts criminal proceedings. Worthy note: FTNX as expert, assisted a legal firm to defend an ill informed Jordanian intermediary who did manage to buy and sell 12 shipments of IRAQI crude oil about a decade ago. He received 4 years prison time in a U.K goal and had his earning confiscated under proceeds of crime legislation.Work within the legal ‘scope of your business ’ or face consequences is the clear message also being advised here.
BILLS OF EXCHANGE (BOE)
A deal where documents for cash is apparent, means that the supplier is producing the document to its bank with a BOE that he has also created, in return for payment pertaining to goods sold to an end buyer.The bank of the supplier now collects on the BOE via the bank of the end buyer for any qualifying bank. A PCT cannot accept a BOE , because unlike the rest of procedures proper, which bears to enforce current delivery rules and payment rules as it applies to the issuance of a DLC, the BOE has no uniformity in practice in where bank in individual countries have their own banking policies to do with accepting a BOE, just like FTN Exporting making policies about the nature of our business.
A VALID PRICE
The PCT may conduct business to apply a ‘market based commercial contract’ price basis or a ‘standard price commercial contract.’ The former described a SPOT floating price basis which goes up and down, as apparent on a supported international commodity index or ‘stock market board’, where a price is drawn, by the seller, at an agreed upon period and manner-as prescribed in the contract format being enacted upon. The price drawn is what’s payable to the supplier.The PCT cannot simply draw on the same basis unless it is prepared to act as a ‘buyer’ outright. The legal status of ‘the buyer’ is not that of an intermediary, broker or agent, but Principal. A Principal, once such a status is declared by the PCT, conducts business only with other Principals, and therefore becomes subject to a whole host of ‘International rules and laws’ just like the supplier or end buyer must observe. The price of exported goods therefore could rise and fall to favour the supplier or end buyer i.e; in any given month i.e; when a revolving contract is in play. The latter ‘standard’ aspect describes a ‘set price contract’ also often referred to as a ‘fixed price.’ A sell price MUST be apparent on the offer and contract on two fronts when a PCT is heading the deal as a ‘Principal.’ An experienced PCT many for instance, buy sugar ‘at a fixed price’ and sell it at a floating price or visa versa or simply act outright based on the offer ‘fixed price’ basis served. Ostensibly the ‘universal’ rule of contract formation dictates that ‘there is no contract nor offer without a valid price being apparent.’ If payment advice declares for instance; “20% discount from LME ZINC ingots” that’s not a price; that’s a tracking aspect where a price is then established AFTER first delivery.That’s not an offer as no price is apparent. The price of goods MUST be stipulated for first delivery, without it, no DLC can be secured or issued as ‘no value’ is available.The PCT acting as Principal is the ‘first party’ between to others, and who is also the entity actually ‘creating the business being conducted.’ Therefore the PCT cannot act in this business by copying contract and payment terms as initiated directly, when lets say a deal if formed between the ‘Supplier and end buyer directly’ ( and yet this is what many ill informed traders are doing) because unlike such Principals, the PCT does not have legal ‘possession of the goods being sold’ and therefore cannot negotiated on the deal, beyond the aspect of securing and transferring title of the goods being traded.This is the aspect that many Principals as well as 99.9% of ill informed traders and intermediaries do not readily understand. A PCT must have a price apparent to open the DLC in where since the DLC has a 5.0% tolerance factor, the tracking aspect may apply from the second delivery is best assumed. If the basis is applied from first delivery there is a risk that the DLC may not cover a sudden unexpected price rise, which means the PCT is in debit to the supplier from first delivery. The fact that a DLC MUST be used is also confusing to some private traders. The first delivery price is the value of the revolving aspect of the DLC, that no matter what the tracked floating price suggests first delivery is a pre established price basis; without it, no DLC can be issued. Even if later when consolidating “debits and credits” lets say every 4 months, if the supplier will accept a fixed price for first delivery, the difference can later be consolidated as a debit and credit. For instance if the first delivery price of sugar is established at US$ 600.00 per MT FOB via a DLC issuance 30 days prior to first delivery, while the international price is at $640.00 per MT FOB on the actual delivery date, the PCT owes a debt to the supplier of US$ 10.00 per MT. The 5.0% tolerance factor is already stipulated in the contract. The PCT as buyer, may pay the amount owning at this time from his own gains without the need to change the set payment value on the DLC, (and collect the difference from his end buyer as agreed upon i.e: rebate) or the PCT calls for an amendment on the DLC for the next four deliveries to US$ 62.50 per MT in where every payment made, after presuming that such payments are within the 5.0% DLC tolerance factor, the PCT adds separately US$ 2.50 on its invoice as a reimbursement to the supplier for amounts outstanding after consolidation has taken place. So no matter which basis is used, the first price has to be fixed. How its ‘fixed’ is not important, the fact that it needs to be fixed is the issue. After the first delivery, the price may continue to remain fixed, or it may follow an index price basis. If an end buyer knows a supplier well and accepts all assurance and ‘guarantees’ lodged, the supplier can wait for the price to form an average price basis I.e: ‘the day before, the day on and the day after loading’ where the average factor is the price to be paid, where upon acceptance, the contract is signed and payment is made upon ‘delivery.’ If the price of goods rises or indeed falls, i.e: 5 days after the offer was accepted, the agreed upon price 5 days earlier prevails. An end buyer who changes his mind after the offer was accepted, even though the goods have yet to be paid for, is legally bound to perform–or face legal and costly consequences. The PCT cannot conduct such a transaction and much have payment secured 30 days prior to first delivery. To amend the value of the DLC every month will cause added expense and delays as well as other issues especially if a belligerent end buyer becomes apparent. Learning how to consolidate outstanding amounts and offering such aspect to the supplier is a matter for the contract to prescribe. In all cases , to accept the high end security feature of using a DLC, the PCT must establish a value for first delivery on a monthly revolving contract, because matters of contract must be completed long before first delivery is to take place. No supplier will take on the debt to load a ship, and then call for payment at such a time. Before a supplier will load a ship, payment via a DLC or a bank guarantee need to be in place long before first delivery. In our case we can only use the secure virtues of a UCP endorsed DLC as a ‘guarantee’ has the same non viable discrepancies as BOE, which the PCT cannot use.If a supplier agrees to accept a bank guarantee, the PCT must agree to step back from the deal to surrender its PCT position to favour the position of ‘Agent acting for a disclosed principal.’ This way the supplier accepts the bank guarantee, and if issues become apparent after delivery, the supplier bear liabilities and consequences of his actions, not the PCT.
BIDEN VS TRUMP
‘Keep the ship away from the surf and spray’ is what USA presidential nominee is offering. Being ‘wise and prudent’ is a virtue best served with age, practice and experience. On the other hand should Trump win the upcoming election, it is my opinion and fear that the USA and the world will be plunged into ‘economic financial distress’ and probably war. Being a ‘celebrity’ rather that a ‘wise and prudent leader’ serves two very distinctive aspects.The former aspect is about ‘popularity’ regardless of the consequences, the latter is about bearing ‘obligations and responsibilities’ so as to avoid consequences. More importantly however, TRUMP represents the people who voted for him; and thus he ostensibly offers a reflection of what the American people have become. The party is over, TRUMP was ‘tried and tested’ with adverse results, far outweighing any perceived benefit of his presidency. In our business, the PCT has to take on one ‘ deal’ at a time, and to do so ‘one step at a time’ at a slow and considered pace. Badly informed traders only offer bad risk laden deals as well as bad advice and decisions–often with disastrous results. “ If you fish in dirty water expect to catch dirty fish.” Get rid of Trump (GROT) or the world should be preparing to ‘reap the wind’ should Trump get re-elected.“Si Vis Pacem, Para Bellum.” (If you want peace, then prepare for war.) A worthy note: One does not need to be intelligent to become a president of a country; unlike this business where a logical mind and intelligence of the PCT plays a crucial roles in the overall process.
NO RESUCE TRANSACTION ALLOWED
A PCT or others who have failed to practice the virtues of the doctrine choosing to instead work with a ‘ created hybrid’ application incorporating some parts of the FTNX trading aspect, will often seek ‘rescue’ from FTNX or another Informed PCT when the deal they have been working on ‘ starts to collapse.’ An informed PCT must not accept to take on a deal from another PCT which has already been negotiated upon and completed past the offer stage, going into contract stage. FTNX will not assist such traders surrendering such deals to us, nor should any other worthy informed PCT, is a long tested standing rule. Not all informed PCT who have studies the doctrine, follow the strict process therein, because they believe, ‘they know better.’ A PCT securing goods from a supplier unable to move forward, must surrender the supply details to a PCT who is prepared to head such a deal before any offers are made to end buyers. To take on a rescue deal means taking on all the responsibilities and bearing consequences of the PCT surrendering the deal. For example it may mean that whatever promises were made by the first PCT, such promises often are not disclosed to the PCT heading the deal which leaves the PCT and Principal of the string taking on the deal, to be manipulated into providing ‘something which the first PCT was not prepared to serve.’ The second PCT acting on such a deal has to bear all the previous obligation and promises made by the first PCT surrendering the deal; aspects of which often ‘pop up’ when the contracts are due to be signed. If a PCT is to consider rescuing a deal, then the best step is to ‘start again’ with a fresh transaction code. In all cases a PCT must not accept hybrid application offered by another ‘informed ’ PCT if a surrendered deal is in need of rescue.
TESTING NEW PROCEDURES
FTNX always experiments with new procedure. If a deal with a supplier has very low profit margins for the PCT to consider, the PCT is able to make an offer to procure to the supplier where the DLC transfer fee is for the account of the supplier, is now considered a permissible aspect of trade, making the deal more attractive to the end buyer. This is the orthodox aspect of trade proper, but a problematic once for the PCT. Where margin are high, securing supply and offering such goods to the end buyer where it obtains huge slice of the discount secured is the ‘practical and most realistic way’ of doing business as securing real supply fo wanted goods is always more difficult, then securing end buyer to test a purchase. A PCT could back itself by asking for the tF when dealing with the supplier and asking for payment of the TF later when testing and dealing with the end buyer. If one TF is secured and one is not, then the PCT could still proceed with the deal knowing that the TF payment aspect has been covered. A PCT must not pay for the TF to seal a deal, as a huge financial loss could occur after contract are sealed, should one party to the deal reneges on the deal.
Over 50 coal ships are at demurrage off the coast of China because ’Customs’ has found inferior quality of such coal, which is simply another way to inform Australia or any other country that China is not happy with decision made by a Government against Chinese internal policies. In other words, the quality coal has nothing to do with ‘holding up such ships’ which would cost the charter party around US$ 3000.00 a day for each ship unable to offload goods at Chinese ports. Politics effect our business, and as such I have never believed in the need for Government to become involved in trade deals. Goods are offloaded and batch analysis conducted to compare the PSI certification entries applied, when the ship was being loaded. This obviously has not happened in where the Chinese Government has simply directed Customs to act belligerently. FTN Exporting will now require a P.G from suspect end buyer and a ‘walk away’ clause when an end buyer becomes belligerent. There are no short cuts in this business; failing to serve strict procedure often means huge losses could follow.
We still find up to October 202 that many suppliers are still applying incoterms 2010 on their contract models. FTN Exporting position on this matter has been tested with supplies. FTNX applies incoterms 2010 as the basis to its contract ‘unless stated otherwise’ by the end buyer or supplier in where Incoterms 2020 would then apply accordingly is the directive. i.e The buyer may have the option to choses incoterms 2020 delivery rules in where unless stated differently, this offer is served applying incoterms 2010.” A PCT may now also do the same.The simplest aspect is to offer incoterms 2020 outright more so if contracting models used by the PCT have already been changed. Regardless of the delivery term used there is hardly no major difference between Incoterms 2010 and 2020 as it applies to the delivery terms that a PCT is able to effectively use. In this aspect, the doctrine for trade remains a stead fast formidable trading application, with a huge resurgence of ITSI purchasers being recorded for 2020.
B2B TRADING PLATFORMS
Trading platforms are on the way out. A PCT must ‘secure goods personally from a supplier first’ is an aspect for doctrine. This rule must be observed more than ever as delays and changes to staff levels caused by the Coronavirus Pandemic , means securing a stable supplier has become an even more challenging aspect. In one event , FTNX has to restart negotiation with 3 different export managers, 3 times, as each manager has to self isolate. Delays in business and deliveries also comes with this virus.
In 2021, any PCT conducting business with FTNX must now be Certified ‘ITS’ as accredited by FTNX. Society of Professional Commodity Traders (SPCT) are PCT’s who are able to work on their own deals or bring deals for FTNX to consider closing as per the ISS/PA/PI/PIA string aspect. SPCT membership and ITS exam will be open to all qualifying applicants from early 2021 as specified on the publication page.
© FTNX 2020/21