** Basic Knowledge Required for Trading in Natural Resources
- Do You Understand the Flow of the Transactions and the Abbreviations? -
Mr. Tatsuya Oishi, President, Focus Business Produce, Inc.. with the Japan External Trade Organization

The TTPP Newsletter of September 2008 reported the frequent occurrence of trouble in transactions involving recycled materials, metal materials and other resources through the TTPP. To help keep you out of trouble over resource transactions and avoid unnecessary risks, I will explain the general flow of transactions in the resource trade and the main abbreviations used at that time.

International transactions in metal/mineral resources and food resources are characterized by the following three points: First, the sums involved are huge. For example, in term contracts (long term contracts continuing for a fixed period such as several months), sums of tens to hundreds of millions of yen are often seen. Second, specialized brokers or agents often act as intermediaries. Third, due to the large volumes, at the time of FOB contracts, space in specialized ships is sometimes arranged.

Resource transactions used to be generally conducted by specialized businesses.
In recent years, due to the increase in demand, easing of regulations, establishment of infrastructure and spread of the Internet, the environment is being laid enabling more traders to participate in resource transactions.

Along with the increased opportunities, beginners in the resource trade are exposed to greater risk of scams and other dangers.

Therefore, both the seller and the buyer have to reduce the risks by exercising greater caution in procedures compared with general container-based transactions. Seen from another perspective, it means that the seller determines how reliable the buyer is based on the buyer's familiarity with the complicated procedures of the resource trade. Let us introduce an example of the flow of a resource transaction.

[1] Buyer : Sends an LOI and BCL.
[2] Seller: Sends an FCO.
[3] Buyer : Signs the FCO and returns it to the Seller.
[4] Seller: Sends a draft contract to the Buyer.
[5] Buyer : Signs the draft contract and returns it to the Seller.
[6] Buyer : Requests a POP from the Seller.
[7] Buyer : Opens an SBLC or BG.
[8] Seller: Sets a PB.
[9] Seller: Loads and ships the product in accordance with the contract terms.
(Sometimes allows Buyer to witness shipment.) [10] Buyer: Sends payment in accordance with the contract terms.

The hardest things for beginners to understand are abbreviated terms such as LOI, BCL and FCO. Let us explain them next.


1) LOI = Letter of Intent This is a letter by which the Buyer expresses its intent to buy the product. It describes the name of the product, the product specifications and country of origin, quantity, term of the purchasing contract, desired price, terms of transaction (FOB, CFR, CIF, etc.), desired shipment date, method of payment and valid period of LOI.

On the other hand, the Seller's side will sometimes ask for disclosure of the Buyer's bank's name, bank account number, etc. and for its understanding of a "soft probe" so as to investigate the Buyer's ability to pay. A "soft probe"

means the procedure of contacting the Buyer's bank through the Seller's bank to briefly investigate the Buyer's ability to pay.

2) BCL=Bank Comfort Letter (Bank Capability Letter) This is a letter issued by the Buyer's bank to the Seller and certifies that the Buyer has sufficient ability to pay for the transaction in question. The BCL may be demanded by the Seller at the stage of the LOI, the time of signing the contract, etc. Several cases are possible.

3) FCO=Firm Corporate Offer (Full Corporate Offer) This is a formal offer by which the Seller proposes details of the transaction and the final price. If the Buyer accepts these terms, it signs the offer and returns it to the Seller. Next, the Seller sends a draft of the contract.
Depending on the transaction, the two parties will sometimes enter negotiations on concluding the contract directly without going through the FCO process.

4) POP=Proof of Product In the same way as the Seller thinks the Buyer's ability to pay is important, the Buyer finds it important to determine if the Seller really owns the products in question or has the right to deal in them. A document proving the ownership or right of trade of the product is called a "POP".

Specifically, this includes an export license issued by an official organization, a warehouse receipt and certification of results of inspection by an independent third party certification organization. However, it is essential to determine if the documents are genuine.

Further, as a method to ensure a more reliable progress in the process, sometimes a POF (Proof of Funds/document proving the Buyer's ability to pay) and POP are exchanged between the Seller's and the Buyer's banks.

5) BG=Bank Guarantee, SBLC=Stand By Letter of Credit, PB=Performance Bond
- A BG is, as the name implies, a bank guarantee. The bank guarantees that the Buyer will pay the debt to the Seller.

- An SBLC differs from a usual L/C (Letter of Credit) in that it is a special letter of credit with no terms requiring attachment of a bill of lading (type of clean letter of credit) and is considered a bank guarantee issued in the form of a letter of credit.

- In the event the Buyer defaults on its debt, in both a BG or SBLC, the issuing bank guarantees payment to the Seller.

- A PB is a proof of performance. It guarantees payment to the Buyer of a fixed percentage of the export price (for example, 2%) in the event of the Seller defaulting on the contract to export to the Buyer as contracted for. Due to this, if the Seller defaults on the contract, the Buyer can be compensated for the expenses required up to that point. Specifically, this is set by the
Seller for the Buyer in the form of a BG or SBLC.

There may be various other variations in the flow of transactions. Further, technical terms and other specialized terminology unique to the industry/ resource will also be used. Therefore, the most important point in resource transactions is sufficient understanding of the products. Can you completely understand the processes involved in a transaction proposed by a seller and do you really have a grasp over the potential risks behind the transaction? If you find this difficult, I recommend you should not let yourself get involved in such a transaction or you leave it to experts such as specialized trading companies.
Above, I explained part of the basic knowledge required for resource transactions. In actual transactions, be sure to check by yourself the flow of transactions and terminology unique to the individual industry and remember that only you are responsible for the transaction.

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