FTNX Q&A 2022
Professional Commodity Traders (PCT)
In Australia our new financial year (2022) is about to commence (1, July 2021) as SMICE and FTNX reset its websites for what will turn out to be a huge year of trade and events, as the Coronavirus pandemic hold firm. Important questions asked by USCT Members are posted here with the relevant answer to ensure member remain vigilant and up to date on important issues as the release of our second publication (COSI) world wide nears. Personal opinions for the author is served without prejudice.
CARGO INSURANCE TO SKYROCKET
Posted: 3 June 2021
Crane collapse at the container port, ships stuck in the Suez Canal, Sri Lank ship sinks, cargo jettison from the ships, collapsing containers mid-sea, port staff becoming ill due to the pandemic, a massive increase in deliveries and freight rates while carriers are in short supply. etc. etc. All this chaos, in the last month alone - is bad news for exporters and importers. Amidst all these adverse conditions, China decides that it's time to 'stir the pot' with Taiwan as if China hasn’t got a serious problem at home to contend with. All these adverse conditions will also mean insurance rates for goods on board are skyrocketing as well. During the Gulf war (1991) reports of insurance coverage representing 4.0% of goods value being insured or more, were reported, for a ship entering contested waters, or nearing troublesome waters near the war zone. Under current new ICC Incoterms 2020, Class ‘A’ insurance cover is now meant to be offered to clients; the offers we have tested in the lasted few months; clients have chosen Class ‘C’ insurance cover which is allowed as it remains an open option. PCT’s are reminded that the cover solicited from the supplier is at 115% not 110% especially when buying NBC like fuel and crude oil. This is going to increase the cost of insurance cover, already heading towards new heights. We suggest that the FOB or CFR delivery modes are promoted more intently and that the CIF delivery mode is only served for large revolving lots if the price of cargo has been purchased with a good discount apparent. In all CIF deliveries, the PCT must protect its earnings by declaring its commission on the seller's invoice. The insurance paid for goods must also cover the commission payments in the advent of a disaster occurring. The PCT will need to secure added gross profit margin for revolving contracts, as conflict on the seas is going to increase dramatically. The PCT will need its OPX to cover late deliveries and unforeseen circumstances. As of late 2020, Cargo insurance rates on average were hovering around 0.6% of cargo value; with rates currently heading towards 1.0 per cent and will exceed this rate if China becomes militarily aggressive towards Taiwan. Cargo value + freight rate Plus 10% = equals 110% issuance cover. 1.0% for cargo value of US$ 50,000,000.00 ( I.e: ULS D2 ), plus 10% = US$ 55,000,000.00 per shipment Plus Commission / OPX or GP of 5.0% maximum of less give us the total value being covered at US$ 57,700,000.00.( 115% Cover). This will equate to just under US$ 600,000 insurance cover premium. For a 100,000 MT load that's around an added US$ 6.00 Per MT to the CIF price basis.
Posted: 5 June 2021
Is the PCT allowed to accept a contract from a supplier still carrying incoterms 2010 terms and conditions and in doing so does the PCT offer the same delivery mode to its client. The answer is ‘Yes’ on both counts. What should be avoided is accepting i.e: incoterms 2020 from the supplier and offer incoterms 2010 to the end buyer or vice versa. A contract is legally binding as per its terms and conditions but ‘harmonisation’ should be present between the contract made with the supplier and PCT and later with the end buyer and PCT. To add a whole lot of paragraphs on a contract to mitigate the effect of one incoterm set of rules, against another, takes time and skill to prepare, therefore the best option is to simply ensure that uniformity is the usage of rules terms and conditions that remain apparent in the trading routine used.
P.G Vs LDD
Posted: 5 June 2021
Do we still ask for a P.G while global tensions are high and the Pandemic is raging on? The P.G is an option for the PCT to consider securing. In 2010, the P.G SLC was not sought from the supplier. By 2017, the P.G SLC was being sought from suppliers once more, as reports of late deliveries were increasing. As stated in ITSI and restated in COSI (2022) the PCT has discretion on this matter. As from late 2020, it became very clear that matters of shipping and port conditions have become problematic. Ostensibly carriers have increased in the failure rate to load ( complete delivery ) on time, much more so on revolving deliveries which we deal in intently if not exclusively. From Jan 1, 2021, FTN suggests that all PCT’s revert to the FTNX in-house application of the LDD application for the next year or so until the current Pandemic becomes controllable ( if ever). The supplier is asked for a LDD as is the end buyer served an LDD, is the best, safest least expensive and most amicable trading aspect from the perspective of the supplier. The ship will continue to fail delivery times, is a very foreseeable aspect, and thus is it is ‘foreseeable’ then asking a supplier to put up a P.G knowing that it will most likely be claimed most of the time, is not conducive to the efforts made by the PCT in securing supply. If the supplier does not agree to provide a LDD, the PCT can still offer it to the end buyer albeit at loss to the PCT as this aspect will reduce anticipated G.P earnings. The controlling mechanism here is to reward the end buyer or supplier for ‘performing’ on time. Hence a ‘Reverse P.G’ (RPG) aspect is in play where the supplier or end buyer receives a rebate as a ‘reward’ for ‘performing on time’ now allows the PCT to omit offering the LDD in favour of a rebate attached to the offer or contract in the form of an IPG or in-house promissory note (PN), now extends the range of the P.G application. Currently some major ports in China are not accepting goods and are being sent to other ports, creating huge logistical problems and huge delays .
CLIMATE CHANGE AND CRUDE OIL DEALS
Posted: 5 June 2021
There are a lot of nonsensical businesses at the moment in light of pending climate change gloom and doom and carbon emission. So much heat and carbon emission produced by investors sending ‘Rockets and possible tourists to the Moon, Mars or whatever.’ A new Concorde type airline travelling twice the speed of sound makes its debut next year. Huge exploration licenses for fossil fuels sought in a place like Alaska are ongoing. The massive increase in the usage of heavy polluting fuel oil used in ships carrying more goods than ever looks like never abating. There is a war or some kind of huge military conflict looming on the horizon as well; nothing like war can dramatically increase fuel prices. Add to this the idea that electric cars are already redundant even though their use has yet to peak to favour going back to more efficient and practical hybrids and hydrogen cells power vehicles, shows us all the ludicrous nature of the claims being made by 97% of all scientists, regarding climate change. I wonder what the other three per cent are thinking? The price of crude oil and ULS D2 will rise dramatically in late 2021 as will its usage in the future, securing supply now using the most amicable and favourable aspects and by offering a premium on price and removing aspects such as the P.G will creating improve the sourcing potential for the PCT. Crude oil future price basis will exceed US$ 110.00 per barrel ‘within a very short time ‘as supply becomes tighter. Crude oil sales are going nowhere fast is currently a verifiable fact. There will be very little or no discounts on crude oil and fuels, except for new oil field discoveries often found in countries holding sanction with the USA. The aspect soon is for the PCT is to learn how to seek supply using premiums; this aspect will be introduced in COSI.