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Incoterms – Which type should I use?

Incoterms – Which type should I use?

digitalisation

August 19, 2019

If you import or export metals and ferroalloys, you have to deal daily with the Incoterms, which regulate in detail the distribution of costs and duties, as well as the transfer of risk between the contractual parties.

But what exactly are Incoterms? What is their function? Which Incoterms are valid and what to keep in mind when negotiating on our marketplace? On this post, we answer these questions and summarize the most important facts about Incoterms 2010.

What are Incoterms?

Incoterms (International Commercial Terms) are predefined and globally-accepted rules used in international commerce to define the obligations, responsibilities, and risks between the buyer and the seller when concluding contracts.

Incoterms are only one aspect of the whole international trade process. They do not say anything about the price to be paid or the method of payment that is used in the transaction. The most recent version of the Incoterms is the Incoterms 2010 into effect since January 1, 2011. In 2020, a whole new set of Incoterms will be released. On our marketplace, the negotiations are done based on this latest terms.

What is their function?

In international business, there can be different interpretations about the obligations and responsibilities, causing a problem between both parties, for example, who is responsible in event of loss, damage or mishap. Incoterms are created in order to standardize and avoid possible misunderstandings.

Benefits

  • They regulate four basic aspects of international sales and purchase contracts: the delivery of goods, the transfer of risks, the distribution of expenses and the processing of customs documents
  • They define clearly the rights and obligations of each party involved in every part of the transport
  • They are universal and recognized worldwide
  • In case of going to court, the Incoterms are helpful to understand who breached in the contract

Which Incoterms are valid?

Incoterms are set every 10 years by the International Chamber of Commerce (ICC). As of today (August 19), there are 11 terms covered by Incoterms 2010. Below you can see the official list. Each of the Incoterm is briefly explained and categorized into 2 types based on the mode of transport.

Incoterms for any mode of transport

1. FCA (Free Carrier)

The seller clears the goods for export and delivers them to the responsible carrier stipulated by the buyer or another party authorized to pick up goods at the seller’s premises or another agreed place. Depending on the agreement, the seller must also load the goods. The buyer assumes all risks and costs associated with the transit and import of goods to the final destination including transport after delivery to the responsible carrier and any customs fees to import the product into a foreign country.

2. EXW (Ex Works)

The seller makes the goods available to the buyer at the seller’s premises or another agreed place (i.e. factory, warehouse, etc.) and at the agreed time. The transport costs, the procurement of the necessary documents and the associated risks are the sole responsibility of the buyer. The seller has no obligation to load the goods or clear them for export.

3. CPT (Carriage Paid To)

The seller clears the goods for export and delivers them to the responsible carrier stipulated by the seller at an agreed place of shipment. Seller is responsible for the transport costs associated with delivering goods to the agreed destination but is not responsible for procuring insurance. The buyer is responsible for the import.

4. CIP (Carriage and Insurance Paid to)

CIP corresponds to CPT, but the seller must also take over transport insurance for the transport from the time of acceptance by the first carrier to the place of destination and bear its costs. Therefore, the seller clears the goods for export and delivers them to the responsible carrier or another person stipulated by the seller at an agreed place of shipment. The seller is responsible for the transport and insurance costs to the agreed place of destination.

5. DAP (Delivered at Place)

The seller is in charge of clearing the goods for export and bears all risks and costs associated with delivering the goods to the agreed place of destination not unloaded. The Buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the country of destination.

6. DDP (Delivery Duty Paid)

Follows the same logic as DAP, but the seller is in charge of paying the import duties. Therefore, the seller bears all risks and costs associated with delivering the goods to the agreed place of destination ready for unloading and cleared for import.

7. DAT (Delivered at Terminal)

The seller undertakes to deliver the goods to a specific terminal (including a port quay, warehouse, container depot, etc.). It is, therefore, relevant that the location is clearly specified. Seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the agreed terminal. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the country of destination.

Incoterms for maritime and inland waterway transport

8. FAS (Free Alongside Ship)

The seller clears the goods for export and delivers them when they are placed alongside the vessel at the agreed port of shipment. The buyer assumes all risks/costs for goods from this point forward.

9. FOB (Free on Board)

FOB extends FAS by the transport of goods on board the ship. Once the goods have been loaded on the ship, all risks are transferred to the buyer, who bears all costs thereafter.

10. CFR (Cost and Freight)

CFR corresponds to FOB, with the difference that with FOB the buyer pays for the ship transport and with CFR the seller. The seller is responsible for paying the delivery costs until the goods arrive at the discharge port. The risks are transferred to the buyer when the products are loaded on the ship.

11. CIF (Cost, Insurance and Freight)

CIF corresponds to CFR, but the seller must also pay for transport insurance for carriage by sea. If anything happens to the cargo before reaching the discharge port the insurance will cover the loss. The buyer is responsible for all costs associated with unloading the goods at the agreed port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are on board the vessel at the port of shipment.

Recommendations when choosing your Incoterms on our marketplace

  • If you are the buyer, when negotiating CIF, please keep in mind that the delivery times are the dates when the material will arrive at the port where the seller stores his material
  • If you are the seller, when negotiating DDP, DAP, DAT  with countries in the European Union, please make sure you have REACH registration for each of your products

By correctly using your Incoterms, you will be able to negotiate more harmoniously, transport and deliver your material more easily, and get paid more quickly. Who does not want that?

Also, please remember that Incoterms are negotiable on our marketplace.

We hope that we could help you with our answers. If you have further questions, please contact us info@metals-hub.com ,we would happy to assist you!