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The Global Ammonia Industry

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The Global Ammonia Industry Powered By Docstoc
					            Ammonia and Nitrogenous Fertilizers
                               A Draft of the Global Market


Table of Contents

1. Global Perspective of Ammonia Industry

2. Algeria Market Overview

3. Ammonium Nitrate Market

4. Urea prices at half last year's quote - Article

5. Urea Uses and Market Data- Article

6. Organizational Structure for Fertilizer Trading Company


APPENDIX

Selected International Trading Concepts
                                                             1
1. Global Perspective of Ammonia Industry

Consumption

Ammonia is the basic input to the production of nitrogenous fertilizers. The aggregate world
fertilizer consumption was 153 million MT in the period 2005/06, a figure that represented an
increase of 3.9% with respect to 2004/05. The International Fertilizer Industry Association (IFA)
projects the global demand up to 184.2 million MT by 2011/12 with an annual growth rate of
2.6%.

Capacity

The global ammonia capacity is expected to grow to 204 million MT by 2015 from 177 million MT
in 2005/06. The major growth centers are located in Middle East, North Africa, and East Asia that
have a ready access to cheap natural gas resources.

Production

World production of ammonia in 2006 stood at 148 million MT, 90% of which goes to manufacture
mineral fertilizers. Major centers of production are the former Soviet Union and Middle East.

Cargo Restriction

Despite world ammonia growth in 2004 and 2005, availability of cargo was restricted in the inter-
regional trade due to capacity constraints and rising maritime freight rates

Worldwide Trade

Ammonia trade across the world, which accounts to 13% of global production, stood at close to
19.5 million MT during 2006 and it is expected to touch the 23 million MT mark by 2015.

Major Importers

India and the U.S. are the major importers of ammonia. 62% of the 8.476 million MT of ammonia
exported from the Middle East is destined for India. Strong Asian demand in 2007 was led by
India followed by Pakistan and Bangladesh. Other importers are South Korea, Western European
countries, Jordan and Latin American countries.

Major Exporters

The major exporters are Middle East (Saudi Arabia, Bahrain, & UAE), former Soviet Union
(Russia & Ukraine), Canada, Germany, Netherlands, Indonesia, and Trinidad.

Prices of Ammonia

The price of ammonia is highly volatile with the lowest recorded price of $106 (CFR India) per
tonne in October/December 2002 and the highest being $326.27 (CFR India) in January/March
2004. The average price ranged between $117 and $304 (CFR India).




1
    Ammonia Industry Today – A Business and Technology Update – Chemical Business, August 2007
                                    World Ammonia Situation 2003

              Production                    Major Exports                 Major Imports
       Country         Million MT    Country           Million MT   Country      Million MT
       China             30.207      Russia               2.499     USA                   5.415
       India             12.595      Trinidad             3.251     India                 1.085
       USA                8.768      Ukraine                1.46    S. Korea              0.841
       Russia             9.113      Indonesia            1.257     France                0.609
       Ukraine            3.934      Canada               0.674     Belgium               0.477
       Canada             3.646      Qatar                0.349
       Trinidad           3.574      S. Arabia            0.372
       Indonesia          4.254      Netherlands          0.476
       Others             32.70      Others               3.431     Others                5.35
       World total       108.79      World                13.77     World                13.78


2. Algeria Market Overview

According to the Algerian Petrochemicals Report Q4 2009 by Business Monitor, this country
possesses a large petrochemical industry but its low capacity utilization rates have led to import
dependability. Algeria’s largest petrochemical plants include Annaba that produces ammonium
phosphate fertilizer, ammonium nitrate and nitric acid, Arzew that outputs ammonia, urea and
ammonium nitrate, and Skikda that gives out High-density polyethylene (HDPE), ethylene cracker
and aromatic products.

Market Structure

The sector is dominated by state-owned Sonatrach and its chemical subsidiary Enterprise
Nationale de l’Industrie Petrochimique (ENIP) that runs a complex at Skidda where the following
by-products are obtained:

   Ethylene
   Chorine and caustic soda
   Hydrochloric acid (HCl)
   Vinyl chloride monomer (VCM)
   PVC
   Low density polyethylene (LDPE)
   High-density polyethylene (HDPE)

Arzew produces petrochemicals including fertilizers. This complex is also source of methanol and
other products such as:

   Resins
   Urea methanol
   Phenol resin
   Melamine resins

The private sector holds about 300 active SMEs. ONGC Videsh, and Indian subsidiary of oil and
gas ONGC, is currently weighing manufacturing opportunities in Algeria.

Algerian petrochemical companies Asmidal and Moubydal produce ammonia, phosphate-
enriched fertilizers, and pesticides. Algerian ENPC specializes in plastics and rubber products for
agriculture, construction, hydraulics, and private household markets
Industry Trends and Developments

 Sonatrach awarded Saipen a contract to build an export terminal near Arzew. The marine
  terminal will manage exports of urea and ammonia from new facilities that Sonatrach is
  currently putting up.

 Sonatrach has signed a major deal to supply gas starting in 2011 to the Sorfert Algérie
  fertilizer complex in Arzew. Sorfert was formed in 2007 to build two ammonia trains and a urea
  production facility designed to produce 3,450 tonnes per day. The project includes storage
  and shipping facilities.

 In 2008, Sonatrach and partners have signed contracts to construct a fertilizer complex at
  Arzew. The Mers El Hadjadj is planned to open in 2012 and will consist of two 2000tpd
  ammonia trains as well as 3,500tpd urea production.

 Another potential project in the fertilizer sector is a manufacturing plant for phosphate
  fertilizers developed in joint venture by Engro Chemical Pakistan and Algeria’s Ferphos. The
  location has not been chosen. The complex will hold a 3,000tpd ammonium phosphate unit,
  three 4,500tpd sulphuric acid units, and three 1,500tpd phosphoric acid plants. The
  construction will last four years.

3. Ammonium Nitrate Market

According to a market research report published in January 2008 by Merchant Research &
Consulting Ltd., Western Europe, the largest ammonium nitrate consumer, accounts for over
30% of global consumption; even though in many European countries such as Belgium, Ireland,
Germany, and the Netherlands, ammonium nitrate application in agriculture is prohibited.

Emerging Players

However, the world market for mineral fertilizers in the coming years will be dominated by the
developing countries, whose share in global production and consumption is steadily growing.

Main Producers

The largest ammonium nitrate producers are the USA and Russia. Significant amount of
ammonium nitrate is manufactured in Central and Western Europe.

About 30% of the globally produced ammonium nitrate is exported. Russia supplies the bulk of
ammonium nitrate to the world and holds the first place in the export of this commodity. Russian
ammonium nitrate is supplied to the former Soviet Union (FSU) countries, Latin America, Middle
East.

Trends in North America and Western Europe

Over medium term trend, the slight gain in the demand for fertilizers in North America may arise
from the expansion of agricultural areas, of course, subject to the rate of fertilizer introduction into
soil. Western Europe will see the decrease in nitrogen fertilizer use. The decrease will be caused
by two factors. Firstly, the market is oversupplied with cheap agricultural commodities which
leads to the changes in the European Union’s common agricultural policy targeted at agricultural
acreage diminution. Secondly, the relative level of fertilizer introduction is considered to reach its
optimal point in terms of agricultural efficiency and ecological safety.
Trends in the Global Market

Satisfaction of the demand for nitrogen fertilizers in the developed countries; the shift of the
production to the developing countries which have an access to feedstock; augmentation of the
competition on the market; possible changes in the key players.

Ammonium nitrate is a highly effective mineral fertilizer, containing no less than 34.4 % of
nitrogen. Ammonium nitrate is a compound that is not found in the natural world. Therefore, it
does not have a natural abundance. Ammonium nitrate has two main uses as fertilizers and
explosives.
                                                          2
4. Urea prices at half last year's quote

ONE of the unheralded positives of the season for grain growers is that urea quotes are less than
half the price they were at their peak in August last year.

The international urea market hit close to a 24-month low about a month ago, at about $US220-
$230/t, meaning any urea bought at this low quote will soon be on Australian shores, where there
will be a port price of around $500/t.

Australian Fertiliser Services Association (AFSA) president Rod Abbott said this would mean
many farmers could expect on-farm prices of around $550-$600/t, depending on freight and
charges.

It compares to a port price at the peak of the nitrogen spike in late August last year of $1063/t,
which went on to retail at up-country prices that reached close to 1300/t in some places.

International prices have rallied slightly by 6-7pc over the past month, but are still only $US250-
$260/t out of the Middle East.

"At these levels, a move of a few percent does not really have a big influence on the price," Mr
Abbott said.

He said the lower pricing levels for urea were flushing out interest - although, as usual, the
primary farmer concerns were seasonal.

"The lower prices make urea applications more attractive, but the market place is more closely
geared to seasonal issues.

"Where I am in Gippsland, my main market is the dairy industry, which is obviously struggling with
the low milk prices - they are happy to see urea prices back, but they are worried about their milk
returns."

On the other hand, Mr Abbott said many cereal growers had a season with reasonable potential
and would benefit from lower urea prices.

"They didn't have to pay the absolute peak prices, your $1200 or $1300, because their usage
period is August/early September, and they had their orders in before the prices really
skyrocketed.



2
    GREGOR HEARD- 23/07/2009 4:00:00 AM. – farmonline
    http://sl.farmonline.com.au/news/state/agribusiness-and-general/general/urea-prices-at-half-last-years-quote/1574962.aspx?storypage=0
"This year many will get prices at close to the bottom of the market."

Incitec Pivot said the price of urea had fallen following a drop in global urea prices.
"As the global price of urea has dropped and as stock has turned over, our average cost of urea
has decreased," said Gary Brinkworth, Incitec Pivot's general manager for Australian fertilisers.

"This has enabled us to pass on a reduction to our distributors.

"Fertiliser price reductions, like increases, reflect changes in global supply and demand factors."

Mr Abbott said there had been a month's worth of slow increases on the international fertiliser
market.

International reports suggest the low prices have flushed out demand among price-conscious
markets such as Egypt and Brazil, and buyers were now comfortable with bulk urea orders.

The next major influence on urea prices will be India, with the market watching to see how much
Chinese urea the Indians purchase this year.
                                         3
5. Urea Uses and Market Data

Urea is a popular solid nitrogen fertilizer because of its high nitrogen content (46%), with nearly
90% of output going into fertilizers. Most world output is in a solid form, either prills or granules, or
crystalline for specialised small-volume uses. In a number of industrialised countries, a growing
volume of liquid product is consumed in the production of nitrogen solution fertilizers, and in liquid
cattle feeds.

Urea is used in the developing regions of the world and is widely traded on international markets
due to its relatively cheap transport costs. While many markets prefer other nitrogen fertilizers for
better agronomic properties, urea is the commodity reference product with an important influence
on most other nitrogen fertilizer prices.

There are two main hubs in urea trade – the Black Sea and Arab Gulf. These flows are said to
determine the global prices. The Black Sea normally supplies Europe and Latin America while the
Arab Gulf supplies North America and Asia/Oceania. All other trade flows tend to be more
regional but can be important when they affect the need for Black Sea or Arab Gulf material.

Urea is also used in the manufacture of urea-formaldehyde (UF) resins produced by the
condensation reaction between urea and formaldehyde. These resins find outlets in adhesives for
paper, board, plywood, surface coatings moulding resins and textile processing. They are also
used to coat textiles, paper and leather.

Another outlet is the synthesis of melamine employed for the production of melamine-
formaldehyde (MF) resins. These are used in adhesives and paints, and for laminates, moulding
compounds, impregnating paper and textiles.

A growing use for urea is in a process called selective catalytic reduction to reduce NOx
emissions from diesel engines. A urea solution (AUS32 or AdBlue) is sprayed into the engine’s
exhaust fumes where it converts the nitrogen oxides to nitrogen and water.

Urea is also a constituent of cattle feeds, and is a useful viscosity modifier for casein or starch-
based paper coatings. Small quantities are used as an intermediate in the manufacture of

3
  ICIS.com
http://www.icis.com/v2/chemicals/9076559/urea/uses.html
Updated: June 2009. Sources: ICB Chemical Profile, 10 November 2008; IFA Annual Conference, Shanghai, May 2009.
polyurethanes, pharmaceuticals, toothpaste, cosmetics, flame-proofing agents, sulphamic acid
and fabric softeners.

Global growth slows

The growth in global urea production slowed from 6.5% in 2007 to only 1.7% in 2008 when it is
estimated by the International Fertilizer Industry Association (IFA) to have reached 146m tonnes.

Global urea trade in 2008 was marked by two distinct phases, said the IFA. Import demand was
buoyant in the first half followed by a sluggish second half with more tonnage available for export
than the import market could absorb. Exports decreased by 10% over 2007 to an estimated
32.8m tonnes.

A few projects suffered delays in commissioning and construction and it is anticipated that future
slippage will occur. The IFA forecasted that world urea capacity will increase by 47m tonne/year
between 2008 and 2013 to reach 210m tonne/year, a growth rate of 5.2%/year.

Global demand for urea is forecast to grow at 3.7%/year to around 175m tonnes in 2013. Much of
the increase was from fertilizer demand while industrial applications for urea, accounting for 12%
of total consumption, is expected to grow at 6.5%/year.

Looking at the urea supply/demand balance from 2009 to 2013, the IFA concluded that there will
be relatively balanced conditions in 2010 and 2011, moving into a growing surplus by 2012.

Urea demand in China was resilient in 2008, despite downward market pressures, growing at 4%
over 2007. However, exports fell by 20% to an estimated 4.7m tonnes, according to the IFA.
China has introduced a new export tax system based on low and high seasons to help boost
exports but at time of writing it was having little impact due to China’s lack of competitive strength.

India ranks as the world’s second largest urea producer as well as a major importer. Capacity
increases will take place in the 2009-2013 period with the IFA estimating 17% growth to 25m
tonnes/year.

The Middle East is expected to become the world’s largest exporting region as capacity is
increased from 15.5m tonne/year in 2008 to 24m tonne/year by 2013.

In the US, apparent consumption is estimated by the IFA at 12.6m tonnes in 2008 and production
at 6.2m tonnes. With growing demand and unchanged capacity, urea imports are likely to grow to
between 7m and 8m tonne/year.

European demand boosted by NOx emissions control

Global consultant Nexant estimates West European output to be 2m tonnes N in 2008, down on
2007's level of 2.2m tonnes N. Production in Central and Eastern Europe (CEE) will rise to 7m
tonnes N in 2008, up from 6.6m N tonnes in the previous year, according to Nexant. Consumption
in Western Europe and CEE will each rise by 100,000 tonnes N in 2008, to reach 3.6m tonnes N
and 2.7m tonnes N, respectively.

World demand growth is put at 3-4%/year over the long term. Nexant says demand in Western
Europe will grow by about 1%/year. Consumption in the industrial sector (for UF/MF resins) is
increasing at close to GDP levels. Demand will also be boosted by the use of urea in diesel
engines to achieve NOx emission targets set by the EU.

CEE markets will grow by 3.5%/year, driven by availability of arable land and the introduction of
urea for diesel emission control in Central Europe. These markets are expected to supply the
growing deficit in Western Europe, says Nexant.
6. Organizational Structure




                                  Organizational Structure
                              for a Fertilizer Trading Company


                                         General
                                       Administration




            International               Marketing                Finance/
            Operations                                           Accounting



                                          Sales
                                             APPENDIX

                    Selected International Trading Concepts from EXPORT911.com
                        http://www.export911.com/e911/export/export.htm


1. Summary of Export-Import Procedure




1 Seller and Buyer conclude a sales contract, with method of payment usually by letter of credit
(documentary credit).

2 Buyer applies to his issuing bank, usually in Buyer's country, for letter of credit in favor of Seller
(beneficiary).

3 Issuing bank requests another bank, usually a correspondent bank in Seller's country, to
advise, and usually to confirm, the credit.

4 Advising bank, usually in Seller's country, forwards letter of credit to Seller informing about the
terms and conditions of credit.

5 If credit terms and conditions conform to sales contract, Seller prepares goods and
documentation, and arranges delivery of goods to carrier.

6 Seller presents documents evidencing the shipment and draft (bill of exchange) to paying,
accepting or negotiating bank named in the credit (the advising bank usually), or any bank willing
to negotiate under the terms of credit.
  7 Bank examines the documents and draft for compliance with credit terms. If complied with,
  bank will pay, accept or negotiate.

  8 Bank, if other than the issuing bank, sends the documents and draft to the issuing bank.


  9 Bank examines the documents and draft for compliance with credit terms. If complied with,
  Seller's draft is honored.

  10 Documents release to Buyer after payment or on other terms agreed between the bank and
  Buyer.

  11 Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the goods or
  the delivery order.


  2. Outline of Trade Contract Responsibilities of the Seller (Exporter) and Buyer (Importer)


1) Inland freight in Seller's country;
    Delivery to the carrier or frontier
2) Customs clearance in Seller's
    country
3) Payment of customs charges
    and taxes in Seller's country
4) Loading to the main carrier or
    means of conveyance
5) Main carriage/freight
6) Cargo (marine) insurance
7) Unloading from the main carrier
    or means of conveyance
8) Customs clearance in Buyer's
    country
9) Payment of customs duties and
    taxes in Buyer's country
10) Inland freight in Buyer's country
11) Other costs and risks in Buyer's
    country


  LEGEND:

         Seller is responsible
         Buyer is responsible
3. International Commercial Terms (INCOTERMS)

The INCOTERMS (International Commercial Terms) is a universally recognized set of definitions
of international trade terms, such as FOB, CFR and CIF, developed by the International Chamber
of Commerce (ICC) in Paris, France. It defines the trade contract responsibilities and liabilities
between buyer and seller. It is invaluable and a cost-saving tool. The exporter and the importer
need not undergo a lengthy negotiation about the conditions of each transaction. Once they have
agreed on a commercial term like FOB, they can sell and buy at FOB without discussing who will
be responsible for the freight, cargo insurance, and other costs and risks.

The INCOTERMS was first published in 1936---INCOTERMS 1936---and it is revised periodically
to keep up with changes in the international trade needs. The complete definition of each term is
available from the current publication---INCOTERMS 2000. The publication is available at your
local Chamber of Commerce affiliated with the International Chamber of Commerce (ICC).

Many importers and exporters worldwide are accustomed to and may still use the INCOTERMS
1980, the predecessor of INCOTERMS 1990 and INCOTERMS 2000.

EXW {+ the named place}
Ex Works

        Ex means from. Works means factory, mill or warehouse, which is the seller's premises.
        EXW applies to goods available only at the seller's premises. Buyer is responsible for
        loading the goods on truck or container at the seller's premises, and for the subsequent
        costs and risks.

              In practice, it is not uncommon that the seller loads the goods on truck or container
        at the seller's premises without charging loading fee.

           In the quotation, indicate the named place (seller's premises) after the acronym
        EXW, for example EXW Kobe and EXW San Antonio.

             The term EXW is commonly used between the manufacturer (seller) and export-
        trader (buyer), and the export-trader resells on other trade terms to the foreign buyers.
        Some manufacturers may use the term Ex Factory, which means the same as Ex
        Works.

FCA {+ the named point of departure}
Free Carrier

        The delivery of goods on truck, rail car or container at the specified point (depot) of
        departure, which is usually the seller's premises, or a named railroad station or a named
        cargo terminal or into the custody of the carrier, at seller's expense. The point (depot) at
        origin may or may not be a customs clearance center. Buyer is responsible for the main
        carriage/freight, cargo insurance and other costs and risks.

              In the air shipment, technically speaking, goods placed in the custody of an air
        carrier is considered as delivery on board the plane. In practice, many importers and
        exporters still use the term FOB in the air shipment.
            The term FCA is also used in the RO/RO (roll on/roll off) services.

           In the export quotation, indicate the point of departure (loading) after the acronym
       FCA, for example FCA Hong Kong and FCA Seattle.

            Some manufacturers may use the former terms FOT (Free On Truck) and FOR
       (Free On Rail) in selling to export-traders.

FAS {+ the named port of origin}
Free Alongside Ship

       Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within
       reach of its loading equipment so that they can be loaded aboard the ship, at seller's
       expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance,
       and other costs and risks.

             In the export quotation, indicate the port of origin (loading) after the acronym FAS,
       for example FAS New York and FAS Bremen.

           The FAS term is popular in the break-bulk shipments and with the importing
       countries using their own vessels.

FOB {+ the named port of origin}
Free On Board


       The delivery of goods on board the vessel at the named port of origin (loading), at seller's
       expense. Buyer is responsible for the main carriage/freight, cargo insurance and other
       costs and risks.

             In the export quotation, indicate the port of origin (loading) after the acronym FOB,
       for example FOB Vancouver and FOB Shanghai.

             Under the rules of the INCOTERMS 1990, the term FOB is used for ocean freight
       only. However, in practice, many importers and exporters still use the term FOB in the air
       freight.

           In North America, the term FOB has other applications. Many buyers and sellers in
       Canada and the U.S.A. dealing on the open account and consignment basis are
       accustomed to using the shipping terms FOB Origin and FOB Destination.

              FOB Origin means the buyer is responsible for the freight and other costs and risks.
       FOB Destination means the seller is responsible for the freight and other costs and risks
       until the goods are delivered to the buyer's premises, which may include the import
       customs clearance and payment of import customs duties and taxes at the buyer's
       country, depending on the agreement between the buyer and seller.

           In international trade, avoid using the shipping terms FOB Origin and FOB
       Destination, which are not part of the INCOTERMS (International Commercial Terms).

CFR {+ the named port of destination}
Cost and Freight
       The delivery of goods to the named port of destination (discharge) at the seller's
       expense. Buyer is responsible for the cargo insurance and other costs and risks. The
       term CFR was formerly written as C&F. Many importers and exporters worldwide still use
       the term C&F.

           In the export quotation, indicate the port of destination (discharge) after the acronym
       CFR, for example CFR Karachi and CFR Alexandria.

           Under the rules of the INCOTERMS 1990, the term Cost and Freight is used for
       ocean freight only. However, in practice, the term Cost and Freight (C&F) is still
       commonly used in the air freight.

CIF {+ the named port of destination}
Cost, Insurance and Freight


       The cargo insurance and delivery of goods to the named port of destination (discharge)
       at the seller's expense. Buyer is responsible for the import customs clearance and other
       costs and risks.

            In the export quotation, indicate the port of destination (discharge) after the acronym
       CIF, for example CIF Pusan and CIF Singapore.

             Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight
       only. However, in practice, many importers and exporters still use the term CIF in the air
       freight.

CPT {+ the named place of destination}
Carriage Paid To

       The delivery of goods to the named place of destination (discharge) at seller's expense.
       Buyer assumes the cargo insurance, import customs clearance, payment of customs
       duties and taxes, and other costs and risks.

            In the export quotation, indicate the place of destination (discharge) after the
       acronym CPT, for example CPT Los Angeles and CPT Osaka.

CIP {+ the named place of destination}
Carriage and Insurance Paid To

       The delivery of goods and the cargo insurance to the named place of destination
       (discharge) at seller's expense. Buyer assumes the import customs clearance, payment
       of customs duties and taxes, and other costs and risks.

            In the export quotation, indicate the place of destination (discharge) after the
       acronym CIP, for example CIP Paris and CIP Athens.

DAF {+ the named point at frontier}
Delivered At Frontier

       The delivery of goods to the specified point at the frontier at seller's expense. Buyer is
       responsible for the import customs clearance, payment of customs duties and taxes, and
       other costs and risks.
            In the export quotation, indicate the point at frontier (discharge) after the acronym
        DAF, for example DAF Buffalo and DAF Welland.

DES {+ the named port of destination}
Delivered Ex Ship

        The delivery of goods on board the vessel at the named port of destination (discharge), at
        seller's expense. Buyer assumes the unloading fee, import customs clearance, payment
        of customs duties and taxes, cargo insurance, and other costs and risks.

            In the export quotation, indicate the port of destination (discharge) after the acronym
        DES, for example DES Helsinki and DES Stockholm.

DEQ {+ the named port of destination}
Delivered Ex Quay

        The delivery of goods to the quay (the port) at destination at seller's expense. Seller is
        responsible for the import customs clearance and payment of customs duties and taxes
        at the buyer's end. Buyer assumes the cargo insurance and other costs and risks.

           In the export quotation, indicate the port of destination (discharge) after the acronym
        DEQ, for example DEQ Libreville and DEQ Maputo.

DDU {+ the named point of destination}
Delivered Duty Unpaid

        The delivery of goods and the cargo insurance to the final point at destination, which is
        often the project site or buyer's premises, at seller's expense. Buyer assumes the import
        customs clearance and payment of customs duties and taxes. The seller may opt not to
        insure the goods at his/her own risks.

             In the export quotation, indicate the point of destination (discharge) after the
        acronym DDU, for example DDU La Paz and DDU Ndjamena.

DDP {+ the named point of destination}
Delivered Duty Paid

        The seller is responsible for most of the expenses, which include the cargo insurance,
        import customs clearance, and payment of customs duties and taxes at the buyer's end,
        and the delivery of goods to the final point at destination, which is often the project site or
        buyer's premises. The seller may opt not to insure the goods at his/her own risks.

             In the export quotation, indicate the point of destination (discharge) after the
        acronym DDP, for example DDP Bujumbura and DDP Mbabane.

4. Export-Import Quotations

In exporting, the terms quote, offer sheet and price sheet may be used instead of quotation. The
basic information that an export quotation should have includes a description of goods, trade
terms (e.g. FOB, CFR or CIF), unit price, packing, means of delivery (e.g. ocean or air), delivery
time, and payment terms. No strict form is used in the quotation. Using the company letterhead
for a general quotation is quite common.
Units of Measurement

Most countries have officially adopted the metric units (e.g. kilogram, meter, liter, and cubic
meter) of measurement. The Imperial units (e.g. pound, foot, gallon, and cubic foot) and some
local units are still in use in some countries, besides the metric system.
A unit of measurement like the ton may refer to the metric ton (2204.6 lbs. or 1000 kgs.), short ton
(2000 lbs. or 907 kgs.), or long ton (2240 lbs. or 1016 kgs.). The exporter must clearly indicate
the proper unit used in the quotation and contract.

The Preferred Terms of Import Quotation

The preferred terms of import quotation, in the ocean freight, of some of the selected importing
countries (areas) of the world are as follows:

http://www.export911.com/e911/export/quote.htm

Commission Included in the Quotation

When selling through an agent, the commission may be included in the quoted price. The
commission may be reflected using '&C' {+ the percentage rate of commission} or 'C' {+ the
percentage rate of commission} after the trade term. For example, CIF&C5 Bangkok (or CIFC5
Bangkok) means that the quoted price includes a 5% commission.

5. Export Pricing and Penetrating Strategies, Order Quantity (Economics of Scale),and
Foreign Exchange Risks

The primary goal of a business is to make money. Trimming the profit margin in order to win a
deal is not uncommon in exporting. However, sacrificing the profit margin at the expense of
quality must be avoided.

Business practices and standards of living vary from country to country. In some countries a
markup of 25% on imported goods is considered excellent, while others may require at least 60%
in order to survive.

It is very important to know who your competitors are and their selling price and sales strategy.
Quite often, the price competitiveness overrides all other considerations in the initial contact with
the buyer. How a product is priced is crucial in getting the buyer's attention, before the buyer
becomes familiar with the quality of the product, delivery and service. When dealing with a large
importer like chain store, quoting a high price may cause the buyer to lose interest, unless a
business relationship already exists between exporter and buyer, or unless the exporter has a
new product where there is no competition.

Rarely is an exporter able to offer a product to all customers at the same price. Price bargaining
is not uncommon in exporting. However, a few large importers are willing to provide a counter-
offer, unless the product is unique or new and there is little or no competition. If the importer has
a buying agent in the exporter's country, it would be better to contact the agent.

Pricing, Exchange Rates and Price Validity

In some countries, the domestic selling price of imported goods changes a few times a year.
However, in Western countries the selling price usually remains constant throughout the year.
The strategy of selling at a low price for the first order and then increasing the price for the next
order may backfire. The buyer may insist on paying the same, if not a lower, price for the repeat
order. Once a price is lowered, it can be difficult to increase unless competitors are forced out.
Most international transactions are conducted in U.S. currency. The exchange rate fluctuates and
the costs of export goods change. The exporter will lose money in the event of currency
appreciation in the exporting country. For example, three months ago US$1 that was worth 125
Yen is only worth 90 Yen today, which means the exporter will lose 35 Yen for every dollar
converted now. On the contrary, the exporter will receive extra money in the case of currency
devaluation in the exporting country.

In times of exchange rate instability, the exporter can negotiate with the buyer to deal in the
exporter's currency, instead of U.S. funds. The exporter must indicate in the quotation its price
validity, for example, "prices valid for 30 days from date" or "prices subject to our final
confirmation (or acceptance)."

Order Quantity, Production Cost and Freight

The economies of scale in the production and shipping must be considered in export pricing.
Normally, a minimum production run is required in order to stay competitive. The unit cost of
goods generally is lower in a larger order quantity.
In ocean shipments, there is a minimum charge or minimum CBM (cubic meter) requirement in
the LCL (less than container load) delivery. Any shipment having a smaller CBM than the
minimum requirement would be subject to the full amount. For example, if the minimum
requirement is 2 CBM at US$60 per CBM or a minimum charge of US$120, if the consignment is
only 1 CBM, that means the freight charge is still US$120.

It would be more economical to price the goods based on the FCL (full container load) rather than
the LCL, if the order quantity is large enough to fill a container. The exporter can indicate in the
quotation the minimum quantity required for the quoted price.

A trick the importer may use in order to get a lower price is to inflate the quantity requirement. For
example, the actual quantity of product Z the importer requires is 1,000 dozens at US$2/dozen,
the quantity could be inflated to 3,000 dozens, which cost US$1.80/dozen. The exporter would
then bargain hard to buy 1,000 dozens at US$1.80/dozen.

Sometimes, it is necessary to be flexible in the quantity requirement, depending on the customer
and circumstance, for example in the first order---initial order or trial order.

Allowance for Defective Products

Damages incurred to the insured goods in transit may be claimed from the insurance company.
At times, goods are damaged due to mishandling at the buyer's warehouse. Some buyers may
claim such damages in the form of a discount. The exporter should reserve in the pricing 1% or
2%, depending on the customer and product history, as an allowance for defective products. A
higher percentage may be required for fragile goods such as glassware

Hidden Commission

The hidden commission, usually 2% or 3% of the export price, is not uncommon in some
exporting countries. It is given by the exporter to the buying agent for each successful deal, as
compensation for supplying inside information on the competitive selling price, and for the
opportunity of having the exporter's product introduced to their overseas principal.

Harmonized Commodity Description and Coding System (HS)

The HS---Harmonized System or Harmonized Commodity Description and Coding System---was
developed by the Customs Cooperation Council (CCC) in Brussels, Belgium, as the basis for an
international system to classify goods for customs purposes. It is a 10-digit system presently
being used by most of the world's trading partners. The HS is an update of the CCCN (Customs
Cooperation Council Nomenclature), which was redrafted and renamed in 1965 from the BTN
(Brussels Tariff Nomenclature), produced in 1957. The HS information is available at the customs
office and government external trade department.

The buyer's customs broker may encounter ambiguity in identifying the tariff number of a new
product from the exporter. The ambiguity can be due to a vague product composition, which may
mean a different tariff code (number) and import duty. Under these circumstances, the buyer may
request the exporter to provide the proper HS code.


6. Export and Import Permits (Licenses)

Export Permits (Licenses)


The export permit or export license is a form of non-tariff barrier. Its purposes include:

 control of the kind and quantity of products going out of a country (e.g. military or strategic
  goods and sensitive materials),
 control of the export destination of the product, that is, prohibit exportation to an enemy
  country or to a country under sanctions imposed by the United Nations,
 regulate the incoming foreign exchange, and
 stop the underground economy or illegal manufacturers and exporters

In many countries, the exporter must obtain a specific export permit for each shipment, but a
shipment valued below a minimum requirement does not require a permit.

The government foreign trade office or the Central Bank is in charge of export licensing. In many
countries, specific export permit can be obtained from authorized banks, with the exception of
goods requiring a special permit.

The specific export permit application usually requires the presentation of a valid letter of credit
(the original usually). In cases where an authorized bank is the advising bank, presentation of a
photocopy of the letter of credit may satisfy the requirement. An application fee may be required.

The specific export permit can be valid for 30, 60 or more days from date of issue. In case the
validity of the permit is short in a country, exporters should properly time its application to meet
the shipment date. The export permit number is normally required in the export declaration forms.

The exporter may be required to present a valid business license in order to apply for an export
permit. In the process, illegal manufacturers and exporters are stopped. In certain countries, the
export-trader is required to indicate on the export declaration forms the name and business
license number of the manufacturer from whom the export goods originate.

In a few countries, the export permit is issued once to cover all consignments, except goods
falling under the Export Control List, which either require a special permit or are prohibited from
exportation. The list of export and import controlled or prohibited goods is available at the
customs office or the government foreign trade office.

Import Permits (Licenses)

The import permit or import license is a form of non-tariff barrier. Its purposes include:

 control of the kind and quantity of product coming into a country,
 control of the import origin of the product,
 regulation of the outgoing foreign exchange, and
 stop illegal importers

In many countries, the importer must obtain a specific import permit for each import shipment, but
a shipment valued below a minimum requirement does not require a permit.

The government foreign trade office or the Central Bank is in charge of the import licensing. In
many countries, the specific import permit can be obtained from authorized banks, with the
exception of goods requiring a special permit.

The import permit application may require the presentation of a pro forma invoice (the sales
confirmation). An application fee usually is required.

In certain countries, depending on the availability of the country's foreign exchange reserves at
the time of an import permit application, the importer may be required to deposit a sum in local
currency, or in foreign currency based on the currency used on the invoice which is often in U.S.
fund, equal to a percentage (20% to 100% usually) of the invoice value before a permit is
granted. A deposit is required in certain countries in the application of a letter of credit (L/C) after
the import permit is issued, not before the issuance of the import permit.

The importer may be required to present a valid business license in order to apply for an import
permit. In the process, illegal importers are stopped.

In a few countries, the import permit is issued once to cover all consignments, except goods that
require a special permit.

The L/C from the importer's country may stipulate that the import permit or license number is to
appear on all or specified export documents, otherwise the bank will reject such documents.

7. Methods and Tools of Payment in Exporting and Importing

The process of exporting is incomplete without receipt of payment. Export income is considered
earned only when payment has been received.

Letter of Credit (L/C)

The most popular and a safer method of payment is by a confirmed irrevocable letter of credit at
sight.

Documentary Collections

 Documents Against Payment (D/P)
 Documents Against Acceptance (D/A)

Cheque and Bank Draft

In exporting to the offshore countries, payment by cheque and bank draft occur more often in a
small order, ranging from a few hundred to a couple of thousand U.S. dollars. Cheques and bank
drafts are often used in open account and consignment trade arrangements.

Both large and small companies may default in their payments, regardless of the amount
involved. In times of economic uncertainty, both large and small companies may go out of
business. It is important to receive the cheque or bank draft before releasing the shipment.
Unless the integrity of the importer is known, it is very important to wait until the cheque or bank
draft has cleared before the shipment. International clearing of cheques and bank drafts takes 3
to 4 weeks usually (except in a sight draft with a paying bank in the seller's country).
Not all cheques and bank drafts are genuine, and not all genuine cheques carry a cash value
(please refer to the Fly-By-Night Importers for related information).

Trade Arrangements Using the Cheque and Bank Draft

 Open Account

In an open account trade arrangement, the goods are shipped to a buyer without guarantee of
payment. Quite often, the buyer does not pay on the agreed time. Unless the buyer's integrity is
unquestionable, this trade arrangement is risky to the seller.

   Consignment

In a consignment trade arrangement, the seller ships the goods to the buyer when there is no
purchase made. The buyer is obliged to pay the seller for the goods when sold. The seller retains
title to the goods until the buyer has sold them.

   Cash In Advance (CID)

The cash in advance, which is the safest term of payment, most often is effected using the
cheque or bank draft. In some cases, the CID term is paid using the telegraphic transfer (T/T).

Telegraphic Transfer (T/T)

The telegraphic transfer---cable transfer or wire transfer---is the equivalent of a cash payment that
can be credited directly to the seller's account (the name and address of the seller's bank and the
seller's bank account number are required by the buyer's bank). It is fast and safe. Unlike a
payment by cheque or bank draft, in which the mailing time alone may take several days to few
weeks, plus the clearing time of 3 to 4 weeks for a total of about 4 to 6 weeks before the seller
may receive the cash, by means of T/T the seller may receive the cash in a few hours or days.

It is important to wait until the T/T has been received before making the shipment, especially
when the integrity of the buyer is unknown.

Combination of Letter of Credit and Telegraphic Transfer

A combination of letter of credit (L/C) and telegraphic transfer (T/T) is a popular means of
payment in the undervalue arrangement. The undervalue is an illegal way of reducing or avoiding
the import duties and taxes by underdeclaring the price of imported goods. It is a sneaky way of
bringing the landed cost of imported goods to a competitive level. The undervalue is being
practiced in certain less developed countries, usually involving items whose import duties are
relatively high. There is no need to undervalue the goods if the import duty is 10% or less.
Sometimes, an item having a 15% rate of duty may not need to be undervalued too, depending
on the method of import duty and sales tax calculations in the importing country.
The undervalue arrangement is highly risky. To avoid trouble the exporter should refrain from
using this arrangement. Governments do not encourage exports by undervalue. If an exporter
does not violate the foreign exchange control and tax laws of the exporting country and
international laws such as copyright and patent, the government of the exporting country usually
will not step into the exporter's way in the undervalue arrangement.

The undervalue arrangement uses two sets of documents. For example, an importer contracted
1,000 pieces of product X at FOB US$8 each for a total of US$8,000. The importer may want to
declare 25% only (10% to 50% of contract price is declared usually in the undervalue
arrangement) or at US$2 each for a total of US$2,000. One set of documents will show 1,000
pieces of product X at US$2 each for a total of US$2,000, while the other set shows the true
value.

The importer opens an L/C for US$2,000 and remits the US$6,000 balance by T/T. Following the
foreign exchange control procedures on exports, the exporter must surrender a total of US$8,000
inward remittances to the government. While at the destination port, the importer pays the duties
and taxes based on US$2,000, plus the ancillary expenses required in the arrangement. If the
importer is caught at the port of destination, shipments may be seized by the customs.

The importer has to buy the dollar from the black market and remit it by T/T through a third
country. Most often the T/T will not reach the exporter on the agreed time. Quite often, the
shipment date arrives before the T/T reaches the exporter.

The undervalue arrangement hinges on mutual trust between exporter and importer. The importer
has to be very careful because there is a danger that the exporter may run off after receiving the
T/T. In the event of a sour relationship, the importer may run the risk of being blackmailed by the
exporter through threat of exposing the private arrangement.

With the growing free trade around the world, the undervalue practice is diminishing.

Case Sample:

Hostage in Payment

An unusual situation the exporter may encounter is that the importer may request payment by a
combination of letter of credit (L/C) and telegraphic transfer (T/T) on the pretext of undervalue.
The importer may request to declare 80% (or on other percentage) of the contract price for a
product having a duty rate of less than 10%, and may promise that the T/T portion of each
preceding order will be remitted in the succeeding order. To an inexperienced exporter the
request sounds all right, but it is not. The request is actually a scheme of 'hostage taking' of the
T/T portion or 20% of the contract price, which is a lot of money over time. Do not expect that the
T/T portion of the preceding order will come in on time as promised when the buyer places the
next order. A fraction of the T/T from the first order will come in when the buyer books the third
order.

The buyer holds the T/T portion as a hostage to ensure that the exporter will ship the next order,
otherwise no payment will follow. Moreover, the buyer uses the T/T to deduct for allegedly
defective products. The author once had such a customer from a developed country. At a time
when the buyer owed the company close to US$9,000 in backlog payments, the buyer suddenly
claimed that there were accumulated defective products worth nearly US$4,000. The author
requested photographic proof but the buyer could not present it. The buyer insisted on deducting
the amount otherwise they would not remit the balance payment. The company secretly hired an
independent surveyor at the buyer's country. The surveyor's fee was based on an hourly rate plus
the travelling expenses. The surveyor, armed with a letter of authority from the company, visited
the buyer unannounced, following the company's instructions. The truth ultimately came to light.
The buyer was lying. The company exerted pressure on the buyer and he came to his senses.
The balance amount, minus an amount for damaged products (less than US$300) was turned
over.

Documentary Credits (Letters of Credit)

The documentary credit---letter of credit, documentary letter of credit, or commercial letter of
credit---is an arrangement whereby the applicant (the importer) requests and instructs the issuing
bank (the importer's bank) or the issuing bank acting on its own behalf,
 pays the beneficiary (the exporter) or accepts and pays the draft (bill of exchange) drawn by
  the beneficiary, or

 authorizes the advising bank or the nominated bank to pay the beneficiary or to accept and
  pay the draft drawn by the beneficiary, or

 authorizes the advising bank or the nominated bank to negotiate,

 against stipulated document(s), provided that the terms and conditions of the documentary
  credit are fully complied with

 For purpose of maintaining uniformity in the text, the words "letter of credit", "credit" and "L/C"
  are used on this website to refer to the documentary credit

See the sample

http://www.export911.com/e911/export/docLC.htm

Irrevocable versus Revocable Letters of Credit

A letter of credit (L/C) can be irrevocable or revocable. The L/C usually indicates whether it is an
irrevocable or revocable letter of credit. In the absence of such indication, the L/C is deemed to
be irrevocable.

Irrevocable Letter of Credit

An irrevocable letter of credit cannot be amended or cancelled without the consent of the issuing
bank, the confirming bank, if any, and the beneficiary. The payment is guaranteed by the bank if
the credit terms and conditions are fully met by the beneficiary. The words "irrevocable
documentary credit" or "irrevocable credit" may be indicated in the L/C.
In some cases, an irrevocable L/C received by the beneficiary may become invalid without the
amendment or cancellation of such L/C, for example, when the trade between importing and
exporting countries is suspended such as in a trade sanction, or when the issuing bank has
ceased operation.

There have been cases of an irrevocable L/C being amended without the consent of the
beneficiary in the OEM arrangements. The beneficiaries affected were export-manufacturers from
a developing country. The importers were able to convince and instruct the issuing bank to
amend the latest date for shipment in the L/C, changing to a date earlier than the agreed upon
date, at which time the beneficiary would not be able to ship the OEM products. The importers
used sneaky tactics that aimed to cause the beneficiaries to default in the delivery. The intention
of the importers was to cancel the orders from the existing OEM suppliers and buy from other
suppliers in another developing country where the prices had become lower.

In the event of an amendment like the above-mentioned case, the beneficiary must give
notification of rejection of amendment to the bank that advised the amendment at once.

        Irrevocable and Without Recourse Letter of Credit

        The irrevocable letter of credit received from an advising bank may be indicated as
        "irrevocable and without recourse documentary credit". The words "without recourse"
        mean that the advising bank will not be able to recover the money paid to the beneficiary
        in case the issuing bank does not pay the advising bank.
Revocable Letter of Credit

A revocable letter of credit can be amended or cancelled by the issuing bank at any time without
the consent of the beneficiary, often at the request and on the instructions of the applicant. There
is no security of payment in a revocable letter of credit (L/C). The words "this credit is subject to
cancellation without notice", "revocable documentary credit" or "revocable credit" usually are
indicated in the L/C.
The revocable L/C was not uncommon in the 1970's and earlier when dealing with less
developed countries. It is rarely seen these days in international trade.

Confirmed Irrevocable versus Unconfirmed Irrevocable Letters of Credit

Confirmed Irrevocable Letter of Credit

An irrevocable letter of credit (L/C) opened by an issuing bank whose authenticity has been
confirmed by the advising bank and where the advising bank has added its confirmation to the
credit is known as confirmed irrevocable letter of credit. The words "we confirm the credit and
hereby undertake ..." or "we add our confirmation to this credit and hereby undertake ..." normally
are included in the L/C.
An exporter whose method of payment is a confirmed irrevocable L/C is assured of payment even
if the importer or the issuing bank defaults. The confirmed irrevocable L/C is particularly important
from buyers in a country which is economically or politically unstable.

In a confirmed letter of credit, the exporter or the importer pays an extra charge called the
confirmation fee, which may vary from bank to bank within a country. The fee usually is added to
the exporter's account. The exporter may indicate in the sales contract that the confirmation fee
and other charges outside the seller's country are on the buyer's account.

Unconfirmed Irrevocable Letter of Credit

An irrevocable letter of credit (L/C) opened by an issuing bank in which the advising bank does
not add its confirmation to the credit is known as an unconfirmed irrevocable letter of credit. The
promise to pay comes from the issuing bank only, unlike in a confirmed irrevocable L/C where
both the issuing bank and the advising bank promise to pay the beneficiary.

Restricted Negotiable versus Freely Negotiable Letters of Credit

Restricted Negotiable Letter of Credit

In a restricted negotiable letter of credit, the authorization from the issuing bank to pay the
beneficiary is restricted to a specific nominated bank. The sample letter of credit is a restricted
negotiable credit, that is, the authorization from The Sun Bank to pay the UVW Exports is
restricted to a specific nominated bank, which is The Moon Bank.

Freely Negotiable Letter of Credit

In a freely negotiable letter of credit, the authorization from the issuing bank to pay the beneficiary
is not restricted to a specific bank, any bank can be a nominated bank as long as the bank is
willing to pay, to accept draft(s), to incur a deferred payment undertaking, or to negotiate the L/C.
The words "this credit is not restricted to any bank for negotiation" or "this credit may be
negotiated at any bank", or similar words, may be indicated on the L/C.
Revolving Letter of Credit

When a letter of credit (L/C) is specifically designated "revolving letter of credit", the amount
involved when utilized is reinstated, that is, the amount becomes available again without issuing
another L/C and usually under the same terms and conditions.

The revolving L/C may be used in shipments of a wide range of goods to a buyer within a period
of time (several months to one year usually).