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Onyx Markets Uncategorised FAQ Incoterms Explained

FAQ Incoterms Explained

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Many oil financial contracts have some reference to Incoterms, these are critical in physical oil trade agreements and valuation. For example, oil priced CIF will reflect variations in freight, insurance costs whereas a FOB (free on board) contract will not be affected.

Incoterms Explained

Incoterms, or International Commercial Terms, are standardised trade terms used in international commerce to clearly define the responsibilities, costs, and risks between buyers and sellers during the transportation of goods. They are divided into two categories based on the mode of transport.

1. EXW (Ex Works)

Categories:

  • Seller’s only responsibility is to make the goods available at their premises.
  • Risk transfers: At the seller’s premises when goods are made available to the buyer.
2. FCA (Free Carrier)

Categories:

  • Seller delivers goods to a carrier chosen by the buyer.
  • Risk transfers: When the goods are delivered to the carrier named by the buyer.
3. CPT (Carriage Paid To)

Categories:

  • Seller pays for carriage to a specified destination.
  • Risk transfers: When the goods are delivered to the first carrier.
4. CIP (Carriage and Insurance Paid to)

Categories:

  • Like CPT, but the seller also provides insurance.
  • Risk transfers: When the goods are delivered to the first carrier.
5. DAP (Delivered at Place)

Categories:

  • Seller delivers goods to a specified destination, ready for unloading.
  • Risk transfers: When the goods are placed at the disposal of the buyer on the arriving means of transport, ready for unloading at the named place of destination.
6. DPU (Delivered at Place Unloaded)

Categories:

  • Seller delivers and unloads goods at a specified destination.
  • Risk transfers: When the goods are unloaded and placed at the disposal of the buyer at the named place of destination.
7. DDP (Delivered Duty Paid)

Categories:

  • Seller is responsible for all costs and risks until goods are delivered, including duties.
  • Risk transfers: When the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport ready for unloading at the named place of destination.
8. FAS (Free Alongside Ship)

Categories:

  • Seller delivers goods alongside the vessel at the named port.
  • Risk transfers: When the goods are placed alongside the vessel at the named port of shipment.
9. FOB (Free on Board)

Categories:

  • Seller is responsible for costs and risks until the goods are loaded onto the ship.
  • The buyer assumes all costs and risks once the goods are on board the vessel.
  • The buyer arranges and pays for freight and insurance.
  • Risk transfers: When the goods are on board the vessel at the named port of shipment.
10. CFR (Cost and Freight, formerly C&F)

Categories:

  • The seller pays for the cost of goods and freight to the destination port.
  • Risk transfers to the buyer when goods are loaded onto the ship at the origin port.
  • The buyer is responsible for insurance.
  • Risk transfers: When the goods are on board the vessel at the port of shipment.
11. CIF (Cost, Insurance, and Freight)

Categories:

  • The seller covers the cost of goods, insurance, and freight to the destination port.
  • Risk transfers to the buyer when goods are loaded onto the ship at the origin port.
  • The seller must provide insurance for the goods during transit.
  • Risk transfers: When the goods are on board the vessel at the port of shipment.

Key Points to Remember

  • For the “C” terms (CPT, CIP, CFR, CIF), while the seller is responsible for arranging and paying for the main carriage, the risk transfers to the buyer at the point of origin, not the destination. This creates a split between the cost and risk.
  • Understanding these risk transfer points is essential for both parties to manage their responsibilities and insurance needs effectively throughout the shipping process.
  • These terms help clarify who is responsible for various aspects of international shipping, including costs, risks, and logistics, making trade smoother and reducing misunderstandings between parties.
  • By using these standardised Incoterms, buyers and sellers can clearly communicate their expectations and responsibilities in international trade transactions, reducing the potential for disputes and ensuring a smoother trading process.