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FTNX Price Basis
So many variable payment price applications
exist, however FTNX applies very specific formulation when costing goods it is prepared to buy an sell
based on a long time experience. All prices are based on the idea that payment is going to be initiated by a DLC and that all buy
prices assume a future deliverable price and payment that the supplier can expect. Some highly sought after goods that are volatile, that is, the buy price is based
on a reliable international index, which
changes often. Volatile goods may need a buy price and premium to also be included, however since USCT members may
trade in smaller single lots, FTNX does not; choosing to transact on large revolving
contracts only, often exceeding 1 billion dollars in value. For a supplier to land
such a contract, a discount on the index price for such goods must also be apparent- whether a premium is offered or not. Billion dollar plus contract are very difficult
contracts to secure.
Examples of factors used
by FTNX when buying goods from a supplier are provided.
(1)Semi FIxed Price Basis
The price of
grade “A” Copper Cathodes on the London Metal Exchange at EXW is let us say US $8000.00 per MT. The supplier offers 500 MT MT per month at FCA Incoterms in a 20 ft FCL, monthly for 12 concectuive
months supply
Plus of Minus 10%
.
UCP DLC
rules allow for all goods
paid under a DLC, a tolerance factor set at -/+ 10% which is not just some kind of trivial number. If the BOL recorded weight exceeds this tolerance factor, delay in payment collection can be expected until waivers are issued. This means collection may proceed
at a delayed rate even though less or more product as ordered is apparent, by a factor of 10% or more. Likewise , if the price of goods exceeds the credit value
by 5.0 percent tolerance
factor, delays in payment could be expected
while an amendment to the DLC
or waivers are served.
Copper Cathodes
Offered at a fixed price of US$7800.00 per MT FCA Incoterms by a supplier to FTNX.
The supplier added a
fixed premium sought of: 4.0% ( US$ 312.00)
Total buy price
at FCA incoterms=US$ 8112.00
per MT FCA
FTNX is seeking a discount per MT for this extraordinary purchase: fixed at : 6.0%
Discount sought: US$ 486.72 Per MT
On first delivery FTNX will pay the supplier : US$ 7625.28 per MT FCA.
For FTNX to consider such a large contract, a reasonable discount is sought to cover all of our operational expenses. FTNX also needs the discount, (not for
its own benefit,
as some
may think)
so it is able
to
offer a discount to its own clients as an inducement and incentive
to buy such goods from FTNX, clients that the supplier does not have, for large deals that don’t often come around. When a client buys an
extraordinary quantity of product, a discount is sought and is
often received, is a reasonable expectation and good business practice whether doing business locally or - internationally.
Revolving Aspect
FTNX only conducts business in large revolving lots. USCT members however are able to transact on small single lots as well. Let us say that for the first 4 deliveries the LME Index price basis used remained within the DLC tolerance factor but on the fifth and 6th
delivery, the price of Cathodes shot up globally ; nearing US$ 9000.00 per MT EXW. Great for the buyer FTNX, not so great for the supplier who may feel that it is being underpaid
‘not on the value of goods–but
rather, its worth.’ FTNX has introduced a Price Mitigation Factor (PMF) to protect itself and the supplier from unfair dealings and ultimately possible breach of contract- an aspect that must be avoided at
all times.
The PMF can be applied to any fixed or semi fixed or variable price basis. Example of a PMF when applied on the offer for the above
transaction
may look as follows. Note; FTNX applied all delivery date to be established on the a 15th day of a delivery month or after the 10th days of the month, to ensure no issues with payment occur during the end of the year christiona festive season of Christmas, when many key staff take holidays, or /and businesses and banking operations are disrupted/ close down for a week or more– from the 20th of December of a given year
up to the 5th of January in the new year.
Price Mitigation Factor
The Buyer FTNX
will read the LME index price for Copper Cathodes on the
contracted monthly
delivery date,
being let us say the
13th day of a given delivery month, at 12.01 pm or before AEST as per the contracted schedule; where on the fifth day it finds a price listed on the LME which parties have agreed on contract to use, is sitting much higher per MT at EXW; meaning
that, at FCA incoterms, the price is even higher
due to the delivery mode actually offered when matters
of delivery are applied.
FTNX may offer that
“should the price of goods”
as offered
exceed, 5.0% of the DLC value, on the first
delivered shipped price; an
updated price and basis may be taken from the LME index used by the parties to the contract,
as
per
its posted gate or EXW MT price; from the second delivery onwards in any given deliverable month,
the supplier may take the new listed price from the
the www.LME.com per MT where
the price is reformulated for the affected month only, for the benefit of the supplier.
As the price rises so may apply on the buyer side, by the buyer
should the price fall by the same rate. This mitigation factor will ensure any loss from price rises or falls, are in part mitigated and is maintained
at the
5.0 percent differential for the life of the contract or until prices come back down to the first delivery price.
Note “from the second month of delivery.”
Late Delivery Means late Payment
A DLC attracts expenses and delays when matters of collection encounter issues when ambiguous entries on documents provided are apparent. Once a contract is signed , a whole lot of effort is
needed to secure the DLC and lodge it into the account
of the supplier. To serve a non cumulative revolving and irrevocable DLC, the first delivery price is set and established to ensure the lodgement process is executed without any issues that requires the value to the
DLC value
to be change at the “last minute” only serves to turn an otherwise good clean deal into a problematic one, attracting more fees and bank charges.
We establish
the DLC first
and are able to negotiate on any price indifference once first delivery is cleanly
initiated. FTNX
lodges the DLC
to the supplier who has 5 banking days to accept it, once accepted
delivery must be completed within 21 days thereafter or the DLC may attract further charges.
When an offer is signed and returned, the supplier is meant to commence delivery operations
while allowing the
issuance and return of
the signed contract which could take up to 21 days to complete, hence allowing for 30 days
from the date the contract is signed for first delivery to be completed is the norm- meaning the contract is returned, the DLC is advised within 5
days thereafter where 5 days is allowed for the supplier to accept it
has already incurred
ten days. In fact the supplier will have completed delivery or is near completing delivery
within 21 banking days of accepting the
credit, because the supplier had already started its loading operations weeks earlier, once the offer was returned as accepted, hence “ first delivery 30 days after contract is signed” supports this
proper orthodox aspect. If the supplier is advised on a variable allowable aspect that loading operations may not commence until contract are signed, means that the contract is signed , the DLC is advised and accepted within
5 banking days of issues
in which within 21 days thereafter or less the goods have been delivered POL. This variation may not give enough time for a supplier to have goods delivered ‘on time.’ Here the schedule
on the contract plays an important aspect. If the supplier needs two month afte the contract is signed to initiate a delivery , then the contract must reflect when the DLC is to be advised.
Fixed Price (2)
Price of goods;
Fixed at € 9258.00 per MT FCA
The supplier
had given a higher price than offered on the LME price basis
for a product that is rising over time due to demand. Price and fixed premium is sought.
This kind of product in large revolving
lots is a much more complex deal to apply, where FTNX buying considerations are less compared to the first price basis.
Variable Price Basis (3)
Price of goods: Price of goods as posted on the LME
as it appears on the 15th day on a given month at 12.01 pm AEST or before is the price payable for goods after a discount of 3.3% of the goods value per delivery has been subtracted.
Above
follows the LME price basis in which the payment will have a 3.3 % deduction on the price of goods arrived at. Note: the ‘price of goods’ not price of the whole contract value; to include matters of Incoterms used.
Differentials
When FTNX deals with a supplier, both entities
have a debit and credit account in play as it applies from their own perspective. So the price of goods has risen ( in line with the mitigation factor)
beyond the 5.0%
tolerance value of the credit - not by much - let us say Ten dollars per MT .All matters of currency and payment are forwarded to the nearest whole cent value.
The full value of the DLC at its maximum collection value
is applied
for where another ten dollars per MT is outstanding and due as payable by FTNX for the benefit of the supplier, the supplier makes
collection and marks on their side
the outstanding amount still, owing. The debit and credit
application applies for three months at a time , where on the 3rd month and every 3 months thereafter, outstanding debits and credits are privately settled with a direct SWIFT cash transfer to the supplier.
The benefit here is that no amendments to the credit need to apply, and therefore no costly added bank charges prevail. Naturally–a cause may be applied on the offer which states, “if the price of good remains higher than the value
of the credit
at 5.0% or above for
three consecutive months, the buyer shall change the value of the credit via an amendment, to an agreed upon new price basis at
the expense
of the
buyer.” Should the original price basis return on the same basis, the buyer may lower the value of the credit on the same basis. In essence however the credit and debit application is the superior aspect
as no added bank charges are payable; as differentials are paid privately as agreed upon on the contract
which is a simple process as parties to a
contract are tied to an ongoing deal and intent therein .
Understanding that even a fixed price basis has its own issues, it is
an important aspect that allows the supplier to maximise
their profits.
Payment of Goods in Advance
Again
the main challenge is for FTNX to lodge the DLC into the supplier account without any problems
arising long before the first delivery date. This means an agreed up front delivery price needs to be established which dictates the revolving value of the credit weeks or month before first delivery is completed. This is the actual price payable
for first delivery where outstanding amounts can be applied for as already indicated ( debit /credit accountability). This one aspect allows FTNX as a buyer to lodge a DLC long before first delivery is due. On the date the contract is signed (CSD) the price is actually taken from the agreed basis used and formulated, this is the DLC issue value allowing FTNX
to lodge the DLC early. FTNX provides a schedule that all parties must agree with. To establish
a credit
to favour a supplier
bearing a value of hundreds of million of dollars means the value of the credit needs to be established early. The DLC as per its revolving value cannot
be advised ‘on the day the ship is loaded’ where a ‘spot’ sell
price is obtained at such a time ( one day before, day on, day after loading–average). Once the contract is signed the buyer FTNX advises it credit within 7 days of contract being signed is a contract condition. FTNX does not use ‘banking days’ but normal days as we are not in the business of chasing globally, details of a bank's operational hours, is another aspect incoterms may need changing.
The Contract
This
is what a contract does, it stipulates who is
responsible for doing what , and who is responsible for added expenses being incurred. Banks are involved
in matters of finance, they have no part in the underlying sale and purchase contract. The revolving credit must support the whole contract value by its issuance and expiry date. If there is a possibility of two ships arriving in a given month, then the revolving credit will have a revolving payment aspect for two or three
shipments in a given month.
The above provides only a small insight of important matters to do with closing a large revolving deal. Single smaller shipments are easier to apply.
Unlike what some
may think an informed PCT has ‘its work cut out for them” as
it takes great efforts and knowledge just to close one revovling transaction-correctly and safely. Added seemingly small mistakes and burdens, in this business could equate to
huge financial losses could
for the unwary trader.
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