The recent slump has left many global industries in a far poorer state of health than they were enjoying six months ago. Amongst the hardest hit, possibly, are the construction, automotive, power and transport industries, with many new projects sidelined until we enter a new period of stability.
The knock-on effect of this downturn is a shrinking of the commodities markets. The copper industry, often seen as a gauge of economic activity, has slumped 45 percent since the metal hit a record high in July 2008. Concomitant with this downturn is a slump in scrap prices, since scrap, rather than ore, is used in around 40 percent of copper production.
IMB Divisional Director Michael Howlett commented: “The Bureau has seen an alarming number of examples in which a buyer has attempted to renege on contractual obligations, in some instances after the shipment has taken place. Alleged discrepancies in documentation are often cited as reasons for a party not to honour its side of the letter of credit agreement.”
One of the cases reported to the Bureau involved a company which had agreed to buy a commodity over a long-term contract at a set price. A changing market, however, has seen the firm presented with an array of different suppliers all apparently able to provide the same goods at a greatly reduced price. This has led the company to try to avoid its contractual obligations to the seller.
The IMB reminds members that, prior to the contract, thorough checks must be carried out on all parties. Independent verification should be sought on the registration and financial integrity of any potential trading partners. Furthermore, references on their past trading performance ought to be independently verified. Details of the proposed contract, such as price, should also be checked against the current market.
Mr Howlett continued: “The contract, essentially a tool for loss minimisation, should be clear and concise in order to avoid any ambiguity. A thorough check is necessary before written agreement, including questioning any terms that do not seem familiar, to ensure that both parties fully comprehend their responsibilities.”
As part of its service to members, the IMB is able to conduct pre-contract checks on commodity transactions. Checks should include obtaining company information and utilising a network of international traders to verify any features of a deal that are out of line with standard industry practice.