International Contracts for Import of Fertilisers - The Fertiliser ...

2/3/2012
IMPORTANCE OF FERTILIZERS
INTERNATIONAL CONTRACT AND
PAYMENT
By
C Unni Krishnan
MMTC Limited
On 22.02.2012
FAI Seminar Kochi
• Most important input for increasing food
grains production
• By 2025, India is estimated to be requiring
about 300 million tonnes of food grains
• Fertilizer consumption is currently
estimated at around 29 million tonnes
IMPORTANCE OF FERTILIZERS IN
INDIA’s INTERNATIONAL TRADE
• India imports about 6.5 million tonnes of urea
• Import of DAP is around 7 million tonnes
• About 6.5 million tonnes of MOP is imported
every year
• Amongst raw materials, India imports about 6
million tonnes of Rock Phosphate, 2 million
tonnes of sulphur, 1.8 million tonnes of Ammonia
and 2.20 million tonnes of Phosphoric Acid
INTERNATIONAL TRADE
• A buyer and a seller
• Specific commodity to be exchanged
• Seller should be able to sell goods
required by the buyer, of the quality and
quantity at the place and time required by
the buyer
• For a “consideration”
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MAIN ACTIVITIES IN
INTERNATIONAL TRADE
• Contracting
• Documentation
• Payments
• Infrastructure
• Chartering
• Insurance
Process Leading to Contracts
• Identification of Business Opportunity
• Identification of supply sources and buyers
• Establishing right price mainly through tenders –
open or limited
• Receipt of Offers against tender
– First stage : techno commercial
– Second stage : price bid
• Evaluation of Offers
• Deciding on buyer/seller leading to contract
WHY CONTRACTS
• Required as buyers and sellers are unknown
to each other
• Seller offers
• Buyer Accepts
• When offer and acceptance is absolute
and unqualified – it is a contract
What is a Contract
• Legally binding exchange of promise or
agreement between parties
• Enforceable by Law
• Breach of Contract is recognised by Law
and remedies are available
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Key Legal Elements
• Offer and Acceptance
• Consideration
• Intention to Create Legal Relationship
Different Types of Contracts
• Long-term Contracts
• Transaction to transaction contracts
• Contract for buying
• Contract for selling
• High-seas sales contract
Contracts in Intl Trade
• Most important and integral document
• Two kinds of contracts
– One with the suppliers
– Another with customers
• All documents flow from contracts
• Fine tuning contractual terms most difficult
• Standardization becoming difficult
Contracts (Contd)
• Competitiveness of marketing reduces
manoeverability
• Consolidation on the supply side overseas
• Hence, contract becomes an instrument
for adding value in the chain, which is
most important
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Difficulties in Contracting
• Standardization of the terms becoming
difficult
• Suppliers have their own standard terms
• With movement of cargo increasing,
shipping terms have become highly cost
sensitive
Difficulties in Contracting (Contd..)
• Minute details deserve major attention
• Despatch/Demurrage rates becoming
highly important
• Pre-berthing delays are common now
(delays before vessels are berthed)
• Knowledge of shipping terms a must
USUAL TERMS OF FERTILIZER
CONTRACTS
• Buyer and Seller
• Commodity
• Detailed specifications
• Quantity (Tolerance)
• Price (based on INCO terms)
• Shipment Schedule
• Packing wherever required
• Delivery Terms
• Shipping Terms
• Payment Terms
• Documents
• Arbitration
• Force Majeure
• General Terms
INCO Terms
• Developed, maintained and promoted by
ICC (International Chamber of Commerce)
• To make international trade easier
• First introduced in 1936 by ICC
• Latest edition in 2010
• 11 Inco Terms in all
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INCO Terms (contd)
INCO Terms usually used
• The 13 Terms
– EXW (Ex-works)
– FAC (Free Carrier)
– FAS (Free Along Side)
– FOB (Free On Board)
– CFR (Cost and Freight)
– CIF (Cost, Insurance and Freight)
– CPT (Carriage Paid to)
– CIP (Carriage and Insurance Paid to)
– DDP (Delivered duty paid)
– DAT (Delivered at Terminal)
– DAP (Delivered at Place)
FOB
– Carriage to be arranged by buyer
– Risk pass from seller to buyer once goods cross ship’s rail
– Costs transfer from seller to buyer once goods cross ship’s rail
C&F
– Carriage to be arranged by seller
– Risk pass from seller to buyer once goods cross ship’s rail
– Costs transfer from seller to buyer at the port of destination buyer paying
such costs as are not for the seller’s account under contract of carriage
CIF
– Carriage to be arranged by seller
– Risk pass from seller to buyer once goods cross ship’s rail
– Costs transfer from seller to buyer at the port of destination buyer paying
such costs as are not for the seller’s account under contract of carriage
OTHER INCO Terms
• Delivery Ex Ship (DES) : Goods are placed at
the disposal of the buyers on board the ship but
“not cleared for import at the named port of
destination”
• Delivered Ex-quay (DEQ) : Seller makes good
available to the buyer at the quay (Wharf) at
destination nor cleared for imports
• Ex Works (EXW) – Goods placed at the disposal
of the buyer at the seller’s premises
INCO Terms (Contd)
• Free Carrier (FCA) – Seller delivers
goods, cleared for export, to the carrier
nominated by the buyer at named place
• Carriage Paid To (CPT) – Seller delivers
goods to the carrier to named port of
destination
• Carriage and Insurance Paid to (CIP) –
additional insurance
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INCO Terms (Contd)
• Delivered at Frontier (DAF) – goods are placed
at the disposal of the buyer at the place at the
frontier
• Delivered Duty Paid (DDP) – Seller delivers
goods the buyer cleared for import and not
unloaded from arriving means of transport at the
named place of destination
• Delivered Duty Unpaid (DDU) – Seller delivers
goods to the buyer not cleared for import and
not unloaded from arriving means of transport
Financial Instrument – Letters of
Credit
• Mainly Letters of Credit
• Irrevocable without recourse to drawer
• Confirmed
• Negotiation of Letter of Credit
• Documents of Transaction
• Other instruments like DP, etc.
Letters of Credit
• Issued by the bankers of the buyers to the
bankers of the suppliers
• Prescribed as per UCPDC prescribed by ICC
• Means any arrangement whereby issuing bank
acting on the instructions of the customer is to
make payment or accepts bills drawn by a
beneficiary or its order or authorises another
bank to accept the bill or make payment against
presentation of certain prescribed documents
provided that terms and conditions of credit are
complied with
LC (Contd.)
• LC could be revocable or irrevocable – now only
irrevocable
• Normally opening bank, advising bank and
negotiating bank
• LC payable at sight or with usance period
• Confirming bank - Adding “confirmation” to the
credit
• Negotiation means giving value of the draft or
the documents
• As per latest amendment, 5 banking days to
each bank for acceptance or rejection
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LC (Contd.)
• Transferrable Letter of Credit
• Divisible Letter of Credit
Shipping Documents under LC
• Bill of Lading
• Quality Certificate
• Quantity Certificate
• Certificate of Origin
• Stowage Plan
• Invoice
• Bill of Exchange
OTHER TYPES OF PAYMENT
• Payment under Bill of Exchange
- An instrument in writing addressed by
one person (exporter) to another
(importer) signed by the person giving it
requiring the person to whom it is
addressed to pay on demand or at fixed or
determinable future (usance bill of draft) a
certain sum of money to the named party
Payments (Contd)
• Documents Against Acceptance (DA)
- Drawee gives consent to make
payment of the bill amount on the maturity
date by either signing the bill or putting the
date of acceptance or writing across the
bill the word “accepted”.
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Payments (Contd)
• Documents Against Payment (D/P)
– Where exporter expects payment from the
importer immediately on presentation of the
draft
– Till that, negotiating/collecting bank does not
hand over shipping documents.
– Without shipping documents, importer cannot
take delivery of the goods
SHIPPING
• Sea Transport predominant due to its being
largest, most economical and environment
friendly
• As per UNCTAD Review, 95% of trade by
volume and 75% by value is through sea route
• Most of our trade is through Sea Route
• Hence the most important logistic infrastructure
is Port
• Can be divided into Major and Minor Ports
Shipping (Contd)
• Indian ports handle about 600 million tonnes of
cargo
• The aggregate cargo handling capacity is about
one billion tonnes
• Expected to reach 1600 million tonnes by 2025-
26
• Average turn-around improved from 10.10 days
in 1990-91 to 3.85 days in 2008-09
• Average turn-around in Hongkong is 10 hours
Shipping (Cond.)
• Two broad categories – bulk and non-bulk
or break-bulk (normally packed goods)
• India has a coast line of 7517 kms
• 12 Major Ports (6 on West Coast and 6 on
East Coast)
• 185 Minor and Intermediate Ports
• Ports handle 95% of India’s trade in
volume and 70% in value
• India has 517 ships with GRT 7023951
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Shipping (Contd.)
Shipping (Contd.)
ECI
Kolkata/Haldia
Paradeep
Visakhapatnam
Ennore (EPL)
Chennai
Tuticorin
WCI
Cochin
New Mangalore
Mormugao
JNPT
Mumbai
Kandla
OTHER PORT
Major Ports - Advantages
• Major ports managed by Port Trusts
• Ships can berth along-side
• Most of the handling of cargo mechanical
• Availability of Transit Sheds
• Labour is organised
• Hence loading and discharging much
simpler
Minor Ports - Disadvantages
• Minor Ports managed by State Maritime Boards
• Vessels have to anchor outside in the midstream
• Absence of floating cranes and hence shipping
cranes may be required
• Barges are used for taking material to and from
the vessels
• Very little warehousing facilities available
• Connectivity to the port limited
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PORTS (Contd)
. About 60% of total fertilizer (about 65 lakh
tonnes) is handled by 11 major ports
. Major ports handling fertilizers are Kandla,
Mundra, Visakhapatnam,Tuticorin, New
Mangalore, Krishnapatnam, Paradip
. 20 Minor ports handle about 40 lakh tonnes of
fertilizers
. Rozi in West and Kakinada in East are
important minor ports handling fertilizers
EFFICIENCY OF PORTS
• Turn around of ships, faster
documentation, evacuation, etc
• No pre-berthing detention
• Discharge rate is higher
• Adequate storage and evacuation facilities
FACTORS DETERMINING
SUITABILITY OF A VESSEL
• LOA
• Draft
• Beam
• Dead weight
• Number of holds
• Hatch cover
• Number and capacity of cranes
SHIPPING (Contd.)
• Liner - Vessels run on pre-determined
routes
• Tramp – no fixed route and schedule
• Panamax vessels – around 50000 M.T.
Handimax – 25-40000 M.T.
• Chartering – engagement between vessel
owner and the charterer through laid down
terms – such an instrument is called
“Charter Party” or “COA”
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SHIPPING (Contd.)
• Voyage Charter – owner gets freight per tonne
of cargo
• Time Charter – vessel chartered for a particular
period (shipowner responsible for cost of crew,
depreciation, wages, stroes, provisions,
insurance, etc whereas charterer responsible
for costs of fuel, port charges, stevedoring, etc)
• Bareboat Charterer – Charterer becomes the
defacto owner and manages the vessel (in bare
form without crew, etc,)
SHIPPING (Contd)
• Consecutive Voyages – Owners undertake
to perform certain fixed number of
voyages
• Contract of Affreightment (COA) – Owner
and charterer agree to transport certain
quantity of cargo from one port to another
during a fixed period at an agreed freight
Shipping (Contd.)
• For bulk commodities, in tramps (large
vessels), single deck gearless vessels in
large sizes are preferred
• In Liner vessles (small vessels) generally
use tween-deck geared vessels
CHARTER PARTY
• Contract by which shipowner agrees to place
ship at the disposal of a charterer for carriage of
goods from one port to another or for a specified
period
• Shipowner and charterer normally negotiates
through a ship broker
• Standard forms of Charter party are Baltic
International Maritime Conference (BIMCO),
Federation of Natioal Associations of Ship
Brokers and Agents (FONASBA), etc.
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Elements of Charter Party
• Vessel owner and charterer
• Description of vessels, Voyage, etc.
• Laycan – Period during which ship is required to
reach the load port
• NOR
• Freight
• Cargo
• Name of the Ports – loading/discharging
• Demurrage/Despatch Rate
• Exclusion/inclusion – SHEX/SHINC
Charter Party (Contd.)
• Loading and discharging rates/terms
• Laytime – time allowed by the owners to
the charterers for completing cargo
operations without extra payment
• Force Majeure
• Arbitration
CARGO INSURANCE
• Marine insurance protection to damage or loss
of goods (and not for payment or exchange risk)
• Two reasons : Legal dimension and commercial
dimension
• Legal dimension – goods in custody of different
people at different stages
• Commercial dimension – since goods and
payments exchanged through documents, both
buyer and seller have risk at some point
Insurance (Contd.)
• Loss covered in the policy as a result of various
perils to be defined
• “Causa Proxima” means the active, efficient, cause
that sets in motion a train of events which brings
about a result, without the intervention of any force
started and working actively from a new and
independent source” e.g. theft/pilferage but loss due
to unworthy packing
• Kinds of Perils : Maritime perils
: Extraneous Perils
: War Perils
: Strike Perils
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Marine Insurance (Contd)
• Maritime Perils – Perils to which cargo is
exposed in transit
• Extraneous Perils – Incidental perils caused
mainly on account of faults in loading, keeping,
carrying and unloading
• War Perils – caused by war, civil war, revolution,
rebellion, capture, seizure, arrest, etc.
• Strike Perils – caused by strikes, lock outs,
political motive, etc.
Types of Insurance Policies
• Specific Voyage Policy – risks that may
arise during a voyage from one place to
another
• Open Cover – used by large international
trading companies
• Open Policy - covers a series of
consignments, for an agreed amount
CONCLUSION
• Contract – most important document
• No contract is ever complete
• Even the most carefully drafted document
rests on volumes of assumptions
• A well written contract help limit misunderstandings
• Everything else flows from the contract
• Essential to understand international
trading terms
Conclusion (Contd.)
• Equally important to know the financial
instruments – specially Letter of Credit
• Shipping is fundamental to international
trade and hence important for all of us
• Insurance is an important element of
international trade
• Knowledge and up-dation of the above
add to sharpening of our skills
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CONCLUSION (Contd…)
• Objective is to become not only “good
writers of the contracts” but also “good
executors of contracts
• Business is risky, trading is riskier and
International trading is the riskiest.
• It is thus a specialized job and must be
handled professionally.
• Hence, leave it to organizations like …..
By C Unni Krishnan
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