Recently, I had to prepare a shipment for India. It was a large piece of machinery, used in the oil industry, manufactured in our factory in Rotterdam. As always, it was my responsibility to arrange the financial security.
The Letter of Credit (LC), as a trade finance instrument has not fundamentally changed during the past 150 years. LCs have many similarities with bank cheques. However, bank cheques have been phased out and LCs are still being used in today’s trading environment.
Maybe necessity can make a good bargain after all. A company engaged in the supply of steel products to various industries, from construction companies to utilities and energy firms, recently expressed its faith in its suppliers.
Singapore-based trading house Trafigura thought it bought nickel cargoes worth hundreds of millions of dollars. Theshipments comprised about 1,100 containers of a material that was supposed tobe nickel. What actually happened in this case shows how important ‘monitoring’in combination with ‘secure settlement’ is when trading goods internationally.
Different types of documents explained. The moment one’s valuable cargo is loaded on a ship, the carrier (often via an agent) will usually provide a set of documents that are necessary to claim the goods once they have arrived in the port of destination (effectively being put into storage in a warehouse).
A new approach to settling purchases. Many companies import raw materials or components to produce products. If their procurement departments source these from suppliers in countries where they do not have the benefit of an efficient and fair legal system, they expose themselves to certain risks.
Why is change so difficult? In our previous analyses, we established that banks are not optimally set-up to deal with the settlement of international trade, in particular, when goods are transported internationally.
Taking a flyer on a supplier. Most manufacturers and whole-sale distributors are dependent on a regular flow of goods through import, often from far away. For this type of ‘flow’ traditional security documents, if at all appropriate, are often a bureaucracy that can slow things down. What are the alternatives?
Are banks the best partners in trade finance? Following the financial crisis in 2008 and its aftermath, bank regulations were tightened in a major way; at least this is what the authorities had in mind in order to avoid another crisis caused by a shortage of capital in the banking system.
Why dealing with a regulated third party that is not really set-up to achieve secure settlement? We established that the banking business has become a much more capital intensive business, as regulators have declared war on all sorts of hidden forms of leverage (such as the 365-day revolving facilities, amongst others).
If security is required we simply decline the business! Having had experience with the LoC process in a number of different contexts we have had a disproportional number of problems with these documents considering the small volume of business we conducted with counterparties requiring LoCs.
We are a company that manufactures and exports production lines (specialist machinery for a whole host of manufacturers, including the car industry). The high-tech infrastructure for the plants we develop takes time to manufacture and is worth (USD) millions, if not tens of millions.
From a chemical company in Ludwigshafen (Germany). We are a large company producing and trading a whole host of chemicals. Over the years our credit department has implemented procedures to reduce the risk of bad debt. An important aspect is the securing of letters of credit.