Quote from chief_editor on October 6, 2023, 11:28 am

Welcome to a series of insightful experience sharing sessions from Ian, an accomplished commodity broker who later transitioned into a seasoned trader. Over the years, Ian has navigated the intricate and often unpredictable world of commodities, gaining a wealth of knowledge and on-the-ground experience. Through these narratives, Ian delves deep into the nuances of the trade, debunking myths and highlighting the core principles that have anchored his success. Whether you're an aspiring broker, an emerging trader, or someone interested in the world of commodities, Ian's tales from the trenches offer invaluable lessons and a unique perspective on the industry. Join us as we journey through the highs and lows, the challenges and triumphs, and the lessons learned along the way.

Hello everyone, I am from Ian. Today, I'd like to discuss a topic that many have asked me about: the model of foreign trade. Specifically, why bulk trades can fail or succeed. There are three primary factors:

1. Price: This is the cost of goods or services being traded.
2. Logistics: This involves the transportation of the goods.
3. Procedure: Sometimes, even when the price and logistics are agreeable, the process can be the sticking point. The classic dilemma of what comes first: the chicken or the egg, often plays out in negotiations.

In international trade, offshore accounts typically settle in US dollars. Therefore, a company must possess the capability to issue international letters of credit (LC). Why? Because bulk trades often involve goods, like ships, that may be at sea for months, incurring costs.

To illustrate: If I have a hundred million on account, and it incurs a daily cost at 6%, this is significant because the interest or returns from financial products vary with large sums. Hence, there is a policy of letters of credit (LC). This means my cash remains undisturbed. If my company has a good credit standing, I can ask the bank to lend 100% of the funds at maybe 5% or 10% cost to my seller. This reassures the seller that we can pay. The bank then pays the seller on my behalf, and the seller dispatches the goods.

Contracts are signed, and the buyer issues an international LC to the seller (let's say, a UAE seller). Once the seller ships the goods, they provide shipping information like P.O.P. and Q88. These documents assure the buyer and then are passed on to the domestic buyer company. The domestic buyer will pay via either domestic LC or a performance bond. A domestic LC works like an international one but settles in local currency.

For instance, using 5% bank credit, I might issue 100% of the payment to the seller. When the ship arrives, goods are collected, and payments are made. If done post-clearance, the payment is made after the goods have cleared customs.

Performance bonds, on the other hand, are bank guarantees that I will pay once the goods clear customs.

Generally, state-owned enterprises and large international corporates have a higher credit standing, though relatively smaller private firms, especially listed ones, can also be credible. International trade involves many layers, from international and domestic LCs to performance bonds. Middlemen might also be involved, necessitating their own set of agreements. Then there are cargo agents and shipping information to consider.

So, international trade is not as straightforward as one might think. Simply having money doesn't mean one can partake in international trade. Having an LC is advantageous, and a company must have the right operational category. I recently encountered a case where both the buyer and seller were set, but they couldn't issue an LC. The company I could match them with didn't have the right operational category, so the deal fell through. But that's a story for another day. This topic is vast, so I'll leave it here for now.