At Josh and Mak International, our firm has acquired significant expertise in metal transactions throughout 2022, enabling us to conduct future transactions with utmost diligence. In this post, we will shed light on the essential aspects of using Letters of Credit (LCs) for payment in metal trading, specifically focusing on Aluminium and Copper products.
When engaging in a metal transaction with a buyer using an LC, it is crucial to consider the following points in the LC DRAFT contracts to ensure a seamless process. It is important to note that Aluminium is primarily transported via sea due to the prohibitively high cost of air shipping. Buyers commonly request a 45-day line of credit, implying payment after 45 days from the goods’ arrival at their destination. Some may even propose retiring the LC at the Destination Port after inspection. However, this practice deviates from industry standards and is not recommended despite any suggestions.
The best practice is for goods to be paid for (LC being retired) at the Port of Shipping, where the goods are being shipped from, against the Bill of Lading. Any third-party inspections can be easily conducted at this stage to the buyer’s satisfaction.
Accepting payment at the Port of Destination poses financial risks for the seller and can burden them with raising finance for purchasing from the factory. Additionally, factories rarely accept transferable LCs, which puts the responsibility on the seller to pay for goods that may or may not be paid for on time, while the buyer can easily walk away from the deal after receiving the goods. The legal principle here is that once the Bill of Lading is generated, ownership is transferred to the buyer. Therefore, it is sensible for the seller to request payment at the time of Bill of Lading generation.
The typical clauses found in an LC Draft include:
- Whether it is MT 700 (DLC) / MT720 (LC).
- Whether it is Irrevocable or revocable.
- Whether it is Transferable or non-transferable.
- Whether it is a Sight L/C.
- Whether Partial shipments are allowed.
- CIF terms.
- The amount of the LC (generally calculated in USD).
- Port of loading.
- Port of destination.
- Whether inspection will occur at the factory warehouse or the Port of Loading.
- Ideal Term: The buyer nominates their own third-party inspection company at the seller’s warehouse to inspect the quantity, quality, and loading of goods.
- Ideal Term: If the buyer wants the seller to use a specific shipping inspection company, the seller can accommodate this request.
- Whether funds are released when sellers submit shipping documents to the buyer’s bank upon loading at the port.
- Whether sellers can provide a LIVE video of the inspection and loading process at their warehouse.
For any legal matters related to LCs in metal trading, feel free to consult Josh and Mak International. Our experienced team is well-versed in handling LC transactions and can provide expert guidance to ensure a smooth and secure metal trading experience.
